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, Inc. (NASDAQ:CRUS) 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:
1). 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.
2).Margins. Higher sales mean nothing if a company can’t produce profits from them. Strong margins ensure that company can turn revenue into profit.
3). 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.
4). Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
5). 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.
6). 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.
| Factor | What We Want to See | Actual | Pass or Fail? |
|---|---|---|---|
| Growth | 5-year annual revenue growth > 15% | 31.6% | Pass |
| 1-year revenue growth > 12% | 75% | Pass | |
| Margins | Gross margin > 35% | 52.4% | Pass |
| Net margin > 15% | 22.6% | Pass | |
| Balance sheet | Debt to equity < 50% | 0% | Pass |
| Current ratio > 1.3 | 4.11 | Pass | |
| Opportunities | Return on equity > 15% | 33.5% | Pass |
| Valuation | Normalized P/E < 20 | 15.92 | Pass |
| Dividends | Current yield > 2% | 0% | Fail |
| 5-year dividend growth > 10% | 0% | Fail | |
| Total score | 8 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Cirrus Logic last year, the company has gained a point for the second year in a row. Valuations fell even as the stock managed to gain more than 30% over the past year.
Cirrus has posted incredibly strong revenue growth over the past year, as the company has cashed in on the craze toward smartphones and tablets. By making high-end components that enable mobile devices to have high-quality sound, Cirrus has become a big player in the chip market.
The big danger to Cirrus is that it’s incredibly dependent on Apple Inc. (NASDAQ:AAPL) . Given that more than 90% of Cirrus Logic’s revenue came from Apple last quarter, the component-maker’s fortunes will rise and fall with the success and failure of Apple products. Apple shows no signs of giving up on Cirrus, and moves to introduce products at cheaper price points might actually help Cirrus by boosting overall volume even as it potentially squeezes Apple’s margins. Despite attempts to sell to other customers, it’ll take a long time before they can make a dent in the company’s Apple exposure.
Moreover, some of Cirrus Logic’s diversification potential is in sectors that have struggled. For instance, LED lighting has some promise, but Cree (NASDAQ:CREE) has had to work hard to recover from a prolonged slump, and organic-LED technology from Universal Display Corporation (NASDAQ:PANL) represents a potential game-changer in the industry that could lock Cirrus and other traditional LED-makers out in the long run.
For Cirrus to improve, all it needs is for Apple’s strength to return and to start rewarding investors with a sizable dividend. With a pristine balance sheet, reasonable valuations, and solid growth, Cirrus has nearly everything investors want to see in a stock prospect right now.
The article Has Cirrus Logic Become the Perfect Stock? originally appeared on Fool.com and is written by Dan Caplinger.
Fool contributor Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and Universal Display. The Motley Fool owns shares of Apple, Cirrus Logic, and Universal Display.
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