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 VirnetX (AMEX: VHC) 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 VirnetX.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% NM NM
  1-Year Revenue Growth > 12% NM NM
Margins Gross Margin > 35% 70.4% Pass
  Net Margin > 15% 20.6% Pass
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 1.84 Pass
Opportunities Return on Equity > 15% 223.5% Pass
Valuation Normalized P/E < 20 13.57 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   6 out of 8

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; VirnetX had near-zero revenue prior to 2010. Total score = number of passes.

VirnetX scores a surprising 6 points out of 8. The tiny company has made big waves in the past year, settling a lawsuit with one big industry player and going up against some others in the courtroom, as well.

VirnetX makes Internet security software, and until last year, the company had almost no sales. That all changed in 2010, though, when the company settled a patent infringement lawsuit against Microsoft (Nasdaq: MSFT). In exchange for giving Microsoft a license for its software, VirnetX received a cool $200 million in cash.

Buoyed by that legal success, VirnetX filed similar infringement lawsuits against Apple (Nasdaq: AAPL) and Cisco (Nasdaq: CSCO) last August. Shares have bounced up and down as rumors about both possible settlements and takeover bids have ebbed and flowed.

VirnetX definitely isn't a stock for meek investors, as the question of what happens with the remaining patent infringement suits is a binary event that could send shares soaring or plummeting. As a speculation, though, VirnetX presents a special situation that experts in the industry might be able to exploit.

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 doesn't own shares of the companies mentioned in this article. The Fool has written puts on Apple, which is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a diagonal call position on Microsoft, which is a Motley Fool Inside Value choice. The Fool owns shares of Apple and Microsoft and has created a bull call spread position on Cisco Systems. Motley Fool Alpha owns shares of Cisco Systems. 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.