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, then decide if Infinera
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 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 Infinera.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 61.9% | Pass |
| 1-year revenue growth > 12% | 33.5% | Pass | |
| Margins | Gross margin > 35% | 46.9% | Pass |
| Net margin > 15% | (5.4%) | Fail | |
| Balance sheet | Debt to equity < 50% | 0% | Pass |
| Current ratio > 1.3 | 4.62 | Pass | |
| Opportunities | Return on equity > 15% | (6.3%) | Fail |
| Valuation | Normalized P/E < 20 | NM | NM |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total Score | 5 out of 9 |
Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful because of negative earnings. Total score = number of passes.
With just five points, Infinera hasn't arrived at perfection just yet. The optical networking equipment maker finds itself at a critical point in a fast-growing industry.
Infinera is an innovator in the optical space. With its photonic integration technology, Infinera lets customers be more efficient in taking advantage of their network bandwidth, both in terms of cost and equipment.
Unfortunately for shareholders, Infinera faces several challenges. Larger competitors Ciena
Those concerns have hammered the stock repeatedly. Last October, optical networking stocks across the board, including Oclaro
Regardless of concerns, the Internet is continuing to grow, and optical networking is likely to be integral to its ongoing growth. Infinera needs to start delivering on its promises, but if it does, it could easily vault up toward perfection.
Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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