Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Intel (INTC +4.96%) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that the company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Intel.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
|
Growth |
5-year annual revenue growth > 15% |
6.8% |
Fail |
|
1-year revenue growth > 12% |
(1.2%) |
Fail | |
|
Margins |
Gross margin > 35% |
62.1% |
Pass |
|
Net margin > 15% |
20.6% |
Pass | |
|
Balance sheet |
Debt to equity < 50% |
26.3% |
Pass |
|
Current ratio > 1.3 |
2.43 |
Pass | |
|
Opportunities |
Return on equity > 15% |
22.7% |
Pass |
|
Valuation |
Normalized P/E < 20 |
11.62 |
Pass |
|
Dividends |
Current yield > 2% |
4.3% |
Pass |
|
5-year dividend growth > 10% |
11.9% |
Pass | |
|
Total score |
8 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Intel last year, the company has dropped a point as a revenue decline took it further away from perfection. That's a big part of why the stock has dropped by 20% over the past year, dramatically underperforming the Dow Jones Industrials (^DJI +0.50%) and raising questions about the company's ability to keep up with the pace of innovation.
Intel's main struggle over the past year has been dealing with the shift from PCs to mobile devices. In its most recent quarter, Intel's results reflected that challenge, as its PC client division saw sales plunge more than 6%. That's been a huge part of the reason why rival Qualcomm (QCOM +1.78%) has been able to pass Intel in terms of market share. Qualcomm has been much more successful in breaking into the mobile-chip arena with its Snapdragon processors. Intel has tried to respond with its own push into mobile with chips featured in the new Surface Pro tablet, but so far progress has been slow.
One interesting move from Intel is its attempt to get into the Internet TV business. Skeptics note that even Apple (AAPL +1.05%) has had a hard time getting its TV project off the ground, despite the fact that its entire business model has prepared it for a launch that would further enhance its ecosystem of integrated mobile devices and content. Microsoft (MSFT +0.17%) is also hoping to build off the popularity of its Xbox 360 as a streaming hub for content to support a TV service. In contrast to Intel, both Microsoft and Apple have huge followings among consumers who are used to dealing with their respective customer networks.
For Intel to improve, it desperately needs to find a strategic vision that will enable it to move beyond its PC dominance. Until it does so, Intel will struggle to get any closer to perfection, and its stock likely won't produce the results investors want to see.
Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.
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