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 Atmel (NAS: ATML) 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 Atmel.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1.5%||Fail|
|1-Year Revenue Growth > 12%||9.7%||Fail|
|Margins||Gross Margin > 35%||50.4%||Pass|
|Net Margin > 15%||17.5%||Pass|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||3.14||Pass|
|Opportunities||Return on Equity > 15%||29.5%||Pass|
|Valuation||Normalized P/E < 20||19.72||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||6 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
With six points, Atmel has a lot going for it. But some recent concerns have investors wondering if the tech company can keep things together as the mobile market starts to build up steam.
If you've ever touched a touchscreen, then you understand how much value Atmel brings to the mobile-device table. Atmel makes touchscreen controller chips that help make tablets and smartphones work by touch.
You'd think that the road to success for Atmel would run through Cupertino, but Atmel has found another path. Competitors Broadcom (NAS: BRCM) and Texas Instruments (NYS: TXN) have their chips appear in iPads and iPhones, but Atmel has its hand in most of the Android-based competition, including Motorola Mobility and Samsung. Atmel also expects sales to smartphone maker Nokia (NYS: NOK) to play a role in increasing revenue.
Given the strong competition, though, you won't find Atmel everywhere. Atmel missed out on spots in the BlackBerry PlayBook and the TouchPad, losing to Cypress Semiconductor (NAS: CY) , but with sales of both of those platforms going very slowly, it's hard to feel bad for Atmel about that.
The problem so far has been that Android tablets aren't selling either. Analysts are getting impatient with the lack of progress, and the poor performance of the shares shows just how frustrated everyone is with the current situation.
For Atmel to reverse its downward course, it needs to establish itself as the key provider of touchscreen controllers. With all the competition out there, that'll be hard to do. But if Android finally starts to gain traction in the tablet world, then Atmel has a lot of upside potential.
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 the best investments from the rest.
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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Texas Instruments. Motley Fool newsletter services have recommended buying shares of Cypress Semiconductor. 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.
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