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 North American Palladium (NYSEMKT:PAL) 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 North American Palladium.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(4.0%)

Fail

 

1-Year Revenue Growth > 12%

(0.3%)

Fail

Margins

Gross Margin > 35%

18.5%

Fail

 

Net Margin > 15%

(42.0%)

Fail

Balance Sheet

Debt to Equity < 50%

44.1%

Pass

 

Current Ratio > 1.3

1.89

Pass

Opportunities

Return on Equity > 15%

(22.3%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

2 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at North American Palladium last year, the company has given back the point it earned from 2010 to 2011. Revenue growth came to a standstill, and the stock lost more than half of its value over the past year.

As the sole producers of platinum-group metals in North America, North American Palladium and Stillwater Mining (NYSE:SWC) would appear to have a lucrative position in the platinum and palladium markets. With palladium being a key ingredient in producing pollution-controlling catalytic converters for automobiles, both Ford (NYSE:F) and General Motors (NYSE:GM) have traditionally been substantial consumers of the metal.

But North American Palladium simply hasn't seen that boost. Despite jumps in auto sales, it's unclear whether unit volumes will continue to rise. A failure to keep growing could hurt palladium prices. With the company's huge capital expenditures to try to expand its primary Lac des Iles mine, North American Palladium is gambling that palladium prices will hold up long enough to recoup its expansion costs.

Investment demand is also a potential source of interest. The popular ETFS Physical Palladium Shares ETF (NYSEMKT:PALL) has half a billion dollars under management, but the ETF has stopped growing in light of stagnant bullion prices. Until prices rise, investors aren't likely to pile back in.

For North American Palladium to improve, it needs to get Lac des Iles at optimum efficiency and then work on becoming profitable. Only once the red ink stops will North American Palladium have a chance at perfection.

Keep searching
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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Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.