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 KLA-Tencor (Nasdaq: KLAC) 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 KLA-Tencor.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 7.5% Fail
  1-Year Revenue Growth > 12% 84.2% Pass
Margins Gross Margin > 35% 60.3% Pass
  Net Margin > 15% 23.3% Pass
Balance Sheet Debt to Equity < 50% 27.9% Pass
  Current Ratio > 1.3 4.00 Pass
Opportunities Return on Equity > 15% 27.1% Pass
Valuation Normalized P/E < 20 12.28 Pass
Dividends Current Yield > 2% 2.5% Pass
  5-Year Dividend Growth > 10% 20.1% Pass
       
  Total Score   9 out of 10

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

KLA-Tencor scores a near-perfect nine points, falling short only on long-term revenue growth. For now, the stock offers the perfect combination of healthy dividends, good value, and strong financials.

As an integral part of the semiconductor industry, KLA-Tencor makes test equipment to help chip makers like Intel (Nasdaq: INTC) and Samsung maintain quality control by detecting defective chips. During the recession, the stock suffered some huge losses as the largely cyclical semiconductor industry was hit hard. Now, though, demand for semiconductors has never been stronger. With smartphones, tablets, and other mobile devices becoming increasingly popular, device makers need reliable chips.

Still, KLA-Tencor has plenty of competition and peers to measure up to. While Applied Materials (Nasdaq: AMAT) trails KLA-Tencor on net margin and returns on equity, Lam Research (Nasdaq: LRCX) far outpaces KLA-Tencor's ROE despite having much less debt.

Rather than its competitors, the biggest threat to KLA-Tencor in the near future may well come from its hitting the wall on earnings growth. Analysts expect earnings per share to fall in the company's 2012 fiscal year from 2011 levels. Yet even that drop would put the current share price at less than 10 times forward earnings. In a red-hot technology sector, that sounds like the perfect steal for a near-perfect stock.

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 KLA-Tencor 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. The Motley Fool owns shares of Applied Materials. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position on Intel. 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.