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 Affymetrix
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 Affymetrix.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | (3.6%) | Fail |
| 1-Year Revenue Growth > 12% | (7.4%) | Fail | |
| Margins | Gross Margin > 35% | 58.2% | Pass |
| Net Margin > 15% | (0.2%) | Fail | |
| Balance Sheet | Debt to Equity < 50% | 32.2% | Pass |
| Current Ratio > 1.3 | 3.92 | Pass | |
| Opportunities | Return on Equity > 15% | (0.2%) | Fail |
| Valuation | Normalized P/E < 20 | NM | NM |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 3 out of 9 |
Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Affymetrix had negative earnings during the period. Total score = number of passes.
With just three points, Affymetrix hasn't yet discovered the secret of perfection. The company is involved in a groundbreaking business, but its recent financial results have been disappointing.
Affymetrix makes products that help researchers perform genetic tests via DNA coding. Years ago, its GeneChip platform started helping researchers detect potentially life-threatening conditions without the need for biopsies or other. less-subtle detection methods. But when management couldn't turn that promising technology into business success, rival Illumina
Earlier this year, things started looking up for Affymetrix. The company announced a distribution deal with Thermo Fisher Scientific
Unfortunately, Affymetrix hasn't been able to meet its own expectations when it comes to turning its promise into revenue. Just yesterday, the company announced that revenue would fall more than 10% short of what analysts had expected, and shares fell almost 18% in response.
Although the company is cash-flow positive and therefore won't fall into the dilution trap that plagues so many small-cap companies, investors won't take it seriously until it achieves consistent profitability. Affymetrix isn't a perfect stock, and without a big turnaround, it may never become one.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."
