For investors aiming to construct a durable, long-term portfolio, the ideas of quality investing present a strong framework. This method centers on finding companies with lasting competitive strengths, sound financial condition, and the capacity to produce steady, superior profits over many years. Instead of searching for large discounts, quality investors are ready to pay a reasonable price for outstanding businesses they can hold for a very long time. One organized way to find these companies is the "Caviar Cruise" stock screen, which selects for firms with good past revenue and profit increases, high returns on invested capital, solid cash creation, and acceptable debt amounts.
A recent result from this screen is APPLIED MATERIALS INC (NASDAQ:AMAT), a top supplier of materials engineering solutions needed for semiconductor manufacturing. A detailed examination shows how Applied Materials fits the central ideas of quality investing, making it a stock that deserves more study for those with a long-term view.
Matching the Central Quality Investing Standards
The Caviar Cruise screen uses several numerical filters to search for quality. Applied Materials not only meets these tests but performs well in many categories, highlighting the financial traits quality investors seek.
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Lasting Increase: The screen demands at least a 5% compound annual growth rate (CAGR) for both revenue and operating profit (EBIT) over five years. Applied Materials exceeds this with a revenue CAGR of 6.57% and a more notable EBIT CAGR of 14.17%. Importantly, its EBIT increase is faster than its revenue increase, a main filter in the screen. This shows the company is not only growing sales but is also becoming more profitable over time, probably through better operations, pricing ability, or scale benefits.
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Outstanding Capital Use: Maybe the most important measure for quality investors is a high Return on Invested Capital (ROIC), which calculates how well a company produces profits from its capital base. The screen requires an ROIC (leaving out cash, goodwill, and intangibles) over 15%. Applied Materials provides a remarkable 43.57%, showing it is a top-tier operator that creates large value for each dollar put into the business.
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Sound Financial Condition and Cash Flow: Quality companies are not weighed down by debt. The screen uses a Debt-to-Free Cash Flow (FCF) ratio below 5, showing how many years it would take to pay all debt using current cash flow. Applied Materials has a very good ratio of 1.15, meaning it could in theory remove its debt in just over a year with its cash flow, indicating notable financial soundness. Also, its average "Profit Quality" over five years is 89.65%, far above the 75% limit. This indicates the company turns most of its accounting net income into actual, usable free cash flow, a mark of superior earnings.
A Broad Fundamental Perspective
A wider fundamental study of Applied Materials supports the image shown by the screen. The company gets a solid overall fundamental score of 7 out of 10, with very high marks in profitability (9) and financial condition (8).
- Profitability Leader: The company works with top-tier margins, including a 29.86% operating margin and a 24.67% profit margin, doing better than most of its semiconductor equipment industry counterparts. Its return on equity of 34.28% further highlights outstanding management effectiveness.
- Strong Balance Sheet: Besides the low debt load, the company has a good Altman-Z score pointing to low bankruptcy risk and has been regularly lowering its share count, an action favorable to shareholders that can raise the value of remaining shares.
- Valuation & Increase Setting: The study notes that while the stock's price-to-earnings ratio seems high in simple terms, it is fair compared to its high-increase industry. Analysts predict earnings will keep increasing at a double-digit rate. The main point of care is that the high past increase rates in revenue and earnings are predicted to slow a bit in the next few years.
You can examine the full, detailed fundamental study for Applied Materials here.
Why These Measures Are Important for the Long-Term Investor
The Caviar Cruise standards are not random; they are made to find businesses constructed to endure. A high and rising ROIC suggests a lasting competitive advantage, in Applied Materials' situation, its technological lead and essential part in a complicated global supply chain. Better profit quality and little debt offer protection during economic declines and give the company room to spend for the future, pay dividends, or buy back shares without financial strain. The steady increase in revenue and, more significantly, operating profit, points to a business that is becoming stronger over time, not only following a temporary trend.
For investors who follow a buy-and-hold idea, these are the basic traits that can result in building wealth over many years. They show a company that is likely to handle difficulties, reinvest well, and provide value through many market periods.
Finding More Quality Possibilities
Applied Materials acts as a clear example of the kind of company the Caviar Cruise screen tries to find. Investors wanting to find other businesses that meet these strict quality tests can run the screen on their own.
You can find the whole Caviar Cruise screen and see all current passing stocks by using this link: Caviar Cruise Quality Stock Screen.
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Disclaimer: This article is for information and learning only. It does not form a suggestion to buy, sell, or hold any security, including Applied Materials Inc. All investing contains risk, including the possible loss of the amount invested. Investors should do their own complete study and think about their personal financial situation and risk comfort before making any investment choice.
