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 SanDisk (Nasdaq: SNDK) 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 SanDisk.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 15.9% Pass
  1-Year Revenue Growth > 12% 35.3% Pass
Margins Gross Margin > 35% 47.1% Pass
  Net Margin > 15% 26.9% Pass
Balance Sheet Debt to Equity < 50% 29.6% Pass
  Current Ratio > 1.3 4.20 Pass
Opportunities Return on Equity > 15% 26.8% Pass
Valuation Normalized P/E < 20 12.82 Pass
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
  Total Score   8 out of 10

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

With eight points, SanDisk comes pretty close to perfection. But for the lack of a dividend, the stock combines a slew of attractive traits, including strong growth, a healthy balance sheet, and a cheap valuation.

SanDisk has been one of the biggest beneficiaries of the trend toward smartphones. As a primary producer of flash memory, SanDisk has seen huge demand from smartphone makers and believes that the trend will continue this year, especially as tablets come more into vogue. More recently, competitor Micron Technology (Nasdaq: MU) also reported strong flash memory demand.

The question for SanDisk is how some of its long-time rivals will respond to changing demand dynamics. Western Digital (NYSE: WDC) and Seagate Technology (Nasdaq: STX) have long specialized in optical and magnetic storage technology, but if solid-state storage becomes the industry standard, then they'll need to respond in order to catch up with SanDisk and fellow solid-stater STEC (Nasdaq: STEC).

For now, SanDisk appears to have the initiative and is riding high on a wave of financial strength. All it has to do is stay on the right path, and it could reach perfection sooner rather than later.

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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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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.