Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Interactive Brokers Group (Nasdaq: IBKR) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.

  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.

  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.

  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.

  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Interactive Brokers.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 0.2% fail
  1-Year Revenue Growth > 12% (29.6%) fail
Margins Gross Margin > 35% 70.2% pass
  Net Margin > 15% 2.3% fail
Balance Sheet Debt to Equity < 50% 317.4% fail
  Current Ratio > 1.3 1.21 fail
Opportunities Return on Equity > 15% 3.5% fail
Valuation Normalized P/E < 20 3.38 pass
Dividends Current Yield > 2% 0.0% fail
  5-Year Dividend Growth > 10% 0.0% fail
  Total Score   2 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Interactive Brokers only manages a score of 2, leaving it far short of perfect. After a promising start for the niche broker, IB has hit tough times during the market meltdown.

The brokerage industry has gone through a painful price war over the past year. Schwab (NYSE: SCHW), TD AMERITRADE (Nasdaq: AMTD), Vanguard, and Fidelity have traded blows in cutting commissions and offering free ETF trading in an effort to attract customers. E*TRADE Financial (Nasdaq: ETFC) has thus far stayed out of the fray, but it has faced challenges of its own.

Interactive Brokers, in contrast, seeks to avoid all that by sticking to its niches. It offers a sophisticated trading platform with low commissions oriented toward frequent traders, attracting investors who execute far more trades than Schwab's customer base. IB also works as an options market maker, meaning that it acts as the middleman in coordinating trades between buyers and sellers, pocketing a fee in the process.

Unfortunately for IB, that market-making niche fared poorly in 2009. Even though things appear to be turning around in the segment, the stock still trades at low valuations. If investors can regain confidence in the markets, then growth should resume -- and while IB may never get close to a perfect 10, you should see it improve significantly on many of these measures.

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 Interactive Brokers to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Interactive Brokers Group and Charles Schwab are Motley Fool Stock Advisor recommendations. The Fool owns shares of Interactive Brokers Group. 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.