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 Take-Two Interactive (NASDAQ:TTWO) 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 Take-Two Interactive.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

4.9%

Fail

 

1-year revenue growth > 12%

(7.8%)

Fail

Margins

Gross margin > 35%

33.4%

Fail

 

Net margin > 15%

(19.9%)

Fail

Balance sheet

Debt to equity < 50%

67.2%

Fail

 

Current ratio > 1.3

2.37

Pass

Opportunities

Return on equity > 15%

(33.3%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

1 out of 9

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

Since we looked at Take-Two Interactive last year, the company has dropped two points, with the company's balance sheet and gross margins taking a hit. The stock has also done poorly, falling about 20% over the past year.

The video game industry has continued to suffer in 2012, as the inexorable migration of gamers from expensive consoles to cheaper mobile-based games has continued. Although Take-Two has its Grand Theft Auto V release coming out early next year to bolster sales, and rival Electronic Arts (NASDAQ:EA) has seen record results for its latest NFL installment Madden 13, the recent bankruptcy of THQ is a cautionary tale that even hot franchise offerings can peter out over time.

Take-Two may also see pressure from groups responding to recent violence in school attacks. Activision Blizzard (NASDAQ: ATVI) has identified lawsuits from families of victims as risk factors in its quarterly reports, as has Take-Two. In China, Glu Mobile (NASDAQ:GLUU) has seen measures taken in an attempt to remove violent and obscene content from games.

Take-Two isn't giving up without a fight, though. In addition to its console-based games, the company has pushed toward new gaming platforms with the knowledge that failing to do so could make it obsolete in the near future. It certainly doesn't have the mobile focus that Zynga (NASDAQ:ZNGA) has, but its stock has fared far better, as well.

For Take-Two to improve, it needs Grand Theft Auto V to be the smashing success that everyone expects it will be. Anything short of a blockbuster could hammer the shares even further, and potentially keep Take-Two from getting appreciably closer to perfection anytime soon.

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 Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard and Take-Two. 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.