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 American Superconductor (Nasdaq: AMSC) 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 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 American Superconductor.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 52% Pass
  1-Year Revenue Growth > 12% 38.3% Pass
Margins Gross Margin > 35% 39.9% Pass
  Net Margin > 15% 10% Fail
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 3.74 Pass
Opportunities Return on Equity > 15% 10.5% Fail
Valuation Normalized P/E < 20 7.89 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   6 out of 10

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

With six points, American Superconductor doesn't have a big chip on its shoulder. But recently, the renewable power technology company has been having some big problems with its biggest customer.

American Superconductor has tied its fortunes to the surge in interest in renewable energy. But its business model has an interesting twist: Unlike competitors General Electric (NYSE: GE) and Siemens (NYSE: SI) -- which both design and manufacture renewable energy products like wind turbines -- American Superconductor focuses solely on design and then sells its concepts to manufacturing companies, which also end up buying the associated electrical equipment it sells as well.

That approach has given American Superconductor an edge over small manufacturers such as A-Power Energy Generation Systems (Nasdaq: APWR), which has seen disappointing sales of its turbines. But the real competitive advantage American Superconductor has had is in its relationship with Chinese customers that have pushed its wind business forward quickly. The company is also trying to push forward into the solar inverter business, where Power-One (Nasdaq: PWER) and Satcon Technology (Nasdaq: SATC) have seen some struggles recently.

But not everything has been charged up for American Superconductor lately. In April, its largest customer, Sinovel, refused to accept shipments of turbine components and spare parts. The shares have plummeted ever since, losing almost three-quarters of their value so far this year.

That's obviously a major concern and explains the low valuation of the company's shares. Despite those concerns, American Superconductor has some interesting new opportunities ahead of it, including the release of its SeaTitan offshore wind turbine. With so much uncertainty, the company isn't perfect at this point -- but it has quite a bit of potential going forward.

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 American Superconductor 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 Power-One. 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.