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 Westport Innovations (Nasdaq: WPRT) 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 Westport Innovations.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 27% Pass
  1-Year Revenue Growth > 12% 21.7% Pass
Margins Gross Margin > 35% 38.6% Pass
  Net Margin > 15% (28.6%) Fail
Balance Sheet Debt to Equity < 50% 12.9% Pass
  Current Ratio > 1.3 4.33 Pass
Opportunities Return on Equity > 15% (28.9%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   5 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.

Westport Innovations manages a mid-range score of 5. As the world struggles with high oil prices, Westport is poised to help shift some oil demand toward plentiful natural gas.

With increasing supplies of natural gas from shale formations and other sources, the energy markets have moved in two directions. While oil prices have skyrocketed, natural gas prices are still relatively low. That puts Westport, which has developed technology to help diesel engines run on natural gas, in an excellent position to capitalize on the supply and demand characteristics of the energy market in the years to come. The company is collaborating with several engine manufacturing partners worldwide, including Cummins (NYSE: CMI), to get its technology into the marketplace.

The challenge for every clean energy company, including both Westport and peers like gas-infrastructure play Clean Energy Fuels (Nasdaq: CLNE) and passenger-vehicle conversion facilitator Fuel Systems Solutions (Nasdaq: FSYS), is getting the nation on board with a permanent shift in energy policy. When gasoline prices are high, it's easy to get people to agree on other solutions. But in the past, price spikes have been followed by big price decreases, and when oil-based fuels get affordable again, interest in making a huge infrastructure switch drifts away until the next big oil crisis.

Westport isn't profitable now, and until it gets a national commitment to natural gas, the company won't be able to reach its full potential. If the U.S. realizes that home-drilled natural gas is a better, safer alternative to foreign dependence on oil, however, Westport could quickly become a very profitable investment for shareholders.

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.