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 FuelCell Energy (Nasdaq: FCEL) 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 FuelCell Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 23.7% Pass
  1-Year Revenue Growth > 12% 2.9% Fail
Margins Gross Margin > 35% (18.6%) Fail
  Net Margin > 15% (62.4%) Fail
Balance Sheet Debt to Equity < 50% 6.6% Pass
  Current Ratio > 1.3 1.93 Pass
Opportunities Return on Equity > 15% (57%) Fail
Valuation Normalized P/E < 20 NM Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   3 out of 10

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; FuelCell had negative earnings in the period and therefore fails valuation test. Total score = number of passes.

FuelCell only manages to rack up three points. But while most of the measures here are backward-looking, FuelCell has most of its potential ahead of it -- and could easily vault toward perfection with a few well-timed successes.

As an alternative energy company focusing on, well, fuel cells, FuelCell has seen its share of ups and downs. Just as fellow fuel-cell companies Ballard Power (Nasdaq: BLDP) and Plug Power have struggled in their attempts to become profitable, FuelCell has suffered through years of losses without even managing to score a positive gross margin.

Recently, though, enthusiasm for fuel cells has started rising again. In December, FuelCell reported that its order backlog was on the rise, offsetting the negative impact of its earnings miss.

But with gigantic competitors like General Electric (NYSE: GE) and United Technologies (NYSE: UTX) developing fuel cells for commercial applications, FuelCell has a lot to prove before it can turn the corner and get its income statement out of the red.

Although it undoubtedly has a chance to produce strong gains if it succeeds, FuelCell is far from perfect right now. Speculators might feel comfortable taking a flyer on the stock, but more conservative investors should steer clear at least for a while.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. 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.