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 TradeStation Group (Nasdaq: TRAD) 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 TradeStation.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 7.8% Fail
  1-Year Revenue Growth > 12% (9.4%) Fail
Margins Gross Margin > 35% 77.3% Pass
  Net Margin > 15% 10.2% Fail
Balance Sheet Debt to Equity < 50% 0.0% Pass
  Current Ratio > 1.3 1.07 Fail
Opportunities Return on Equity > 15% 7.8% Fail
Valuation Normalized P/E < 20 25.98 Fail
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.

TradeStation falls well short of perfection, scoring just two points, but the poor showing isn't that big of a surprise given the challenges the brokerage industry has faced recently.

Discount brokers like TradeStation have been going through a fierce price war since late 2009, when Schwab (NYSE: SCHW) fired the first shot by lowering commissions and offering ETFs without any trade commissions. Fidelity, Vanguard, and TD AMERITRADE (Nasdaq: AMTD) followed suit with similar offers. That has left the discounters remaining on the sidelines, including E*TRADE Financial (Nasdaq: ETFC), searching for ways to distinguish themselves.

TradeStation, however, isn't after the entire brokerage market. Like Interactive Brokers (Nasdaq: IBKR), TradeStation targets a niche of more active investors, going after institutional investors using rules-based trading strategies that lead to higher trading volume. Active investors are a small fraction of the overall brokerage market, but they bring in a huge proportion of the industry's entire revenue.

Unfortunately, low interest rates have decimated one source of income for brokers like TradeStation: the float on customers' cash balances. But with strong customer metrics and a coming move into the promising futures and foreign exchange markets, TradeStation is poised for a rebound when overall industry conditions improve.

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 TradeStation Group 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 and TradeStation 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.