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 Cirrus Logic (Nasdaq: CRUS) 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 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 Cirrus Logic.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 17.7% Pass
  1-Year Revenue Growth > 12% 19.6% Pass
Margins Gross Margin > 35% 52.5% Pass
  Net Margin > 15% 41.1% Pass
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 3.77 Pass
Opportunities Return on Equity > 15% 47.4% Pass
Valuation Normalized P/E < 20 31.87 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Cirrus Logic last year, the semiconductor maker has picked up an extra point, with long-term revenue growth jumping over the 15% threshold. But Cirrus has had its challenges over the past year, and they've resulted in severe turbulence for the stock.

As a maker of high-end audio chips, Cirrus has benefited from the rise of smartphones. It plays a pivotal role in Apple's (Nasdaq: AAPL) iPhone, so as sales of the device have risen through the roof, Cirrus has profited from Apple's success.

In particular, concerns about a production issue last year made investors worry about Cirrus. Still, as Fool tech analyst Eric Bleeker noted at the time, getting ahead of potential problems like malfunctioning designs is actually a good thing for Cirrus and its relationship with Apple and other customers. That strategy worked for fellow Apple supplier TriQuint Semiconductor (Nasdaq: TQNT) when it realized it didn't have the capacity to supply enough chips for the Verizon iPhone release.

Recently, Cirrus increased its guidance for its fiscal third- and fourth-quarter results, far exceeding revenue estimates that analysts had put on the stock. Its specialized designs drew Harman International (NYSE: HAR) to pick Cirrus to make its first custom car audio chip, which bodes well for the company's ability to go beyond Apple for its success.

For now, with Apple soaring, Cirrus is enjoying the good times. The real question will come when the iPhone excitement dies down. But if Cirrus plays its cards right and builds a wider customer base, it could be well on its way to perfection by then.

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.

Cirrus Logic has promise, but it won't make or break your portfolio by itself. You need plenty of good ideas to build your wealth. Take a look at the Fool's latest special report and you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.

Click here to add Cirrus Logic to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Cirrus Logic, Apple, and TriQuint Semiconductor. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.