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 Rambus (Nasdaq: RMBS) 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 Rambus.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 6.3% Fail
  1-Year Revenue Growth > 12% (9.5%) Fail
Margins Gross Margin > 35% 96.3% Pass
  Net Margin > 15% (1.9%) Fail
Balance Sheet Debt to Equity < 50% 36.6% Pass
  Current Ratio > 1.3 13.85 Pass
Opportunities Return on Equity > 15% (1%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
  Total Score   3 out of 9

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful due to negative earnings. Total score = number of passes.

With just three points, Rambus falls well short of perfection. The company has waited for years for clarity on lawsuits related to alleged patent infringement, but recent news has gone against the chip maker.

Given all of its legal hype, it's easy to forget that Rambus has a core business. Rambus develops standards for memory chips and then licenses its technology to the companies that use them. Looking only at that core business, shareholders have had something to celebrate lately: General Electric (NYSE: GE) announced last month that it would use Rambus technology in an innovative line of LED lighting fixtures.

The problem for Rambus shareholders is that legal drama overshadows the core business. Last year, the company won a decision against NVIDIA (Nasdaq: NVDA), which led to Rambus getting damages and a court-imposed licensing agreement going forward. NVIDIA is currently appealing the decision. Yet the company has plenty of other cases outstanding, including actions against Broadcom (Nasdaq: BRCM), LSI (NYSE: LSI), and Freescale Semiconductor (NYSE: FSL).

The huge mass of litigation pushes Rambus shares up and down with the latest news. For instance, last month, Rambus shares plunged after an appeals court judge found that Rambus had shredded as much as 18,000 pounds of documents that may have related to the case against Micron Technology (Nasdaq: MU).

This may seem far from a perfect situation for investors, but it's the way that Rambus does business. Unless the company wins a final blockbuster victory, it's almost certainly never going to become the 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 Rambus 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. Motley Fool newsletter services have recommended buying shares of and writing puts in NVIDIA. 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.