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 Atmel Corporation (NASDAQ:ATML) fits the bill.
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.
- Moneymaking 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 Atmel.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | (2.7%) | Fail |
| 1-year revenue growth > 12% | (20.6%) | Fail | |
| Margins | Gross margin > 35% | 42% | Pass |
| Net margin > 15% | 2.1% | Fail | |
| Balance sheet | Debt to equity < 50% | 0% | Pass |
| Current ratio > 1.3 | 2.84 | Pass | |
| Opportunities | Return on equity > 15% | 2.9% | Fail |
| Valuation | Normalized P/E < 20 | 64.39 | Fail |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total score | 3 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Atmel last year, the company has seen its score cut in half, as margins, returns on equity, and earnings have all fallen sharply. Those factors are part of what caused the stock to lose a third of its value over the past year.
Atmel makes microcontrollers that enable touch screens to function. Clearly, that’s been a huge growth industry lately, as smartphones and tablets have revolutionized the computing industry and rely almost exclusively on touch-screen input. But Atmel lost out on lucrative MacBook, iPod Touch, iPhone, and iPad business to Cypress Semiconductor Corporation(NASDAQ:CY) and Texas Instruments Incorporated (NASDAQ:TXN), and that combined with weakness in Android tablet sales left Atmel hitting new lows.
Yet as Fool tech expert Evan Niu points out, Atmel has superior technology to Cypress and Synaptics, Incorporated (NASDAQ:SYNA), and the company has had some success in getting into products like the new Surface tablet and some Ultrabook offerings, as well as many Samsung phone lines. The sticking point is cost, where Atmel isn’t the low-price provider, but for higher-margin products, the odds are better that mobile-device makers will pay up for quality. That’s likely the case with Samsung’s top-of-the-line Galaxy S IV, where Synaptics is the main rival but where Evan expects Atmel to retain its position within the phone.
Earlier this month, Atmel gave disappointing guidance for the current quarter. Even as the new Windows 8 operating system makes touchscreens more common, Atmel doesn’t expect sales to reach as high as what analysts had expected. With a sluggish overall semiconductor market, it’s hard for Atmel to reach its full growth potential even with its promising microcontroller business.
For Atmel to improve, it needs to keep scoring wins in the touch-screen market, especially as new players seek to distinguish their products from existing mainstays. If Atmel can make the most of its technological advantages, it could claw back toward perfection in the years ahead.
The article Has Atmel Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Cypress Semiconductor.
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