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 Cognex (Nasdaq: CGNX) 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 Cognex.


What We Want to See


Pass or Fail?

Growth 5-year annual revenue growth > 15% 5.6% Fail
  1-year revenue growth > 12% 59.1% Pass
Margins Gross margin > 35% 73.9% Pass
  Net margin > 15% 21.7% Pass
Balance sheet Debt to equity < 50% 0% Pass
  Current ratio > 1.3 5.65 Pass
Opportunities Return on equity > 15% 14.8% Fail
Valuation Normalized P/E < 20 28.08 Fail
Dividends Current yield > 2% 1% Fail
  5-year dividend growth > 10% (2.6%) Fail
  Total Score   5 out of 10

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

Cognex scores in the middle of the road with five points. But the company's technology is anything but mediocre and in fact promises to change the way manufacturing works.

Cognex is a leader in what's known as "machine vision" -- automated inspection using cameras, sensors, and software that together mimic the human eye. By replacing what used to be done manually with Cognex systems, companies like Ford (NYSE: F) have helped cut costs without sacrificing quality by using inferior automated processes.

For now, the company is giving investors a volatile ride. A few months back, shares plunged after quarterly results disappointed shareholders, despite showing 66% earnings growth and a 46-fold increase in earnings per share. But earlier this month, the company reversed that negative opinion, soaring after beating expectations, posting huge growth, and hiking its dividend for the third time in a year.

But Cognex has advantages over some of its competition. Both Perceptron and Orbotech (Nasdaq: ORBK) have much weaker gross margins and can't match up to Cognex's return on equity. At the same time, though, KLA-Tencor (Nasdaq: KLAC) scores better than Cognex on nearly every measure above, while National Instruments (Nasdaq: NATI) also gives Cognex a run for its money. Yet none of these companies is truly a direct competitor; Cognex has a unique combination of skills tailor-made for its target industry.

Cognex has a ways to go before it reaches perfection. But with a process that could save companies millions of dollars, you'll likely see Cognex's score go up in the years to come.

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.