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 MIPS Technologies (NAS: MIPS) 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 MIPS Technologies.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(3.4%)||Fail|
|1-Year Revenue Growth > 12%||(25.4%)||Fail|
|Margins||Gross Margin > 35%||98.1%||Pass|
|Net Margin > 15%||(3.4%)||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||9.58||Pass|
|Opportunities||Return on Equity > 15%||(2.1%)||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: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at MIPS Technologies last year, the semiconductor designer has had its score cut in half. A huge decline in revenue and profits this year led to the drop, even though the stock has fallen only relatively modestly in comparison over the past year.
MIPS designs semiconductors that get used in a variety of electronic devices, including home entertainment systems and network routers. With partners Broadcom (NAS: BRCM) and Sigma Designs (NAS: SIGM) , MIPS has built a strong presence within digital TVs and set-top boxes.
But lately, MIPS has been under assault. ARM Holdings (NAS: ARMH) took advantage of MIPS having initially missed out on the mobile revolution, as ARM quickly built up 90% market share in smartphones by getting some of the largest smartphone producers to go with its technology. Smart television systems will likely have ARM chips in them, challenging MIPS on its traditional home turf.
Still, MIPS is fighting back. Its chips power devices using the Android 4.0 version known as Ice Cream Sandwich. But the process has been slow going, and one of the devices using MIPS technology has some shortcomings compared even with better-known tablets using earlier versions of Android. Moreover, as Intel (NAS: INTC) starts getting itself more involved in mobile technology, it could pressure MIPS further down to the less-lucrative lower end of the market.
Earlier this month, MIPS got upgraded by an analyst who cited the value of its patent portfolio as the primary driver of its value. Yet unless the company gets bought out, MIPS will have to figure out a better way to make its technology profitable. So far, that has eluded MIPS, but it still represents the best chance the company has to get moving in the right direction again.
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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At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of Intel. 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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