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 TiVo (NASDAQ:TIVO) 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 TiVo.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

(0.1%)

Fail

 

1-Year Revenue Growth > 12%

23.7%

Pass

Margins

Gross Margin > 35%

51.7%

Pass

 

Net Margin > 15%

(24.9%)

Fail

Balance Sheet

Debt to Equity < 50%

63.2%

Fail

 

Current Ratio > 1.3

4.51

Pass

Opportunities

Return on Equity > 15%

(22.5%)

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 TiVo last year, the company gave back the point it earned from 2010 to 2011. The stock has held its own, though, gaining about 5% over the past year.

Once upon a time, TiVo revolutionized the way Americans watch TV. Rather than sitting to watch programs live as they were broadcast, TiVo allowed viewers to record shows and watch them later, skipping over commercials and saving time. Over time, though, the number of subscribers to TiVo's service has diminished.

TiVo has continued to have greater success going after rivals that used its technology without paying licensing fees. In September, Verizon (NYSE:VZ) settled with TiVo in a deal that pays TiVo $100 million upfront for damages along with another $150 million or so for future license and service fees. That deal follows on the heels of a settlement back in March with Microsoft (NASDAQ:MSFT).

But TiVo still has a big case left, having filed a motion last month to join cases against Google's (NASDAQ:GOOGL) Motorola Mobility and Cisco Systems (NASDAQ:CSCO). TiVo is looking for "billions of dollars" in potential damages, putting the likelihood of a substantial settlement quite high.

For TiVo to improve, of course, it needs a business strategy after all this litigation is over and done with. At present, all the company has to do is collect its licensing fees, but to achieve better growth, TiVo will have to expand its technology and find ways to capitalize on mobile devices. If it can do so, then TiVo may find itself heading for another renaissance in the way it does business.

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.

Click here to add TiVo to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Google and Microsoft. Motley Fool newsletter services recommend Google, Microsoft, and TiVo. 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.