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 FLIR Systems (Nasdaq: FLIR) 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 FLIR Systems.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 23.2% Pass
  1-Year Revenue Growth > 12% 26.6% Pass
Margins Gross Margin > 35% 53.9% Pass
  Net Margin > 15% 16.6% Pass
Balance Sheet Debt to Equity < 50% 0.0% Pass
  Current Ratio > 1.3 4.29 Pass
Opportunities Return on Equity > 15% 17.1% Pass
Valuation Normalized P/E < 20 20.38 Fail
Dividends Current Yield > 2% 0.8 % Fail
  5-Year Dividend Growth > 10% NM NM
       
  Total Score   7 out of 9

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; FLIR Systems started paying a dividend in February 2011. Total score = number of passes.

With a score of 7, FLIR Systems has been heating up lately. But the thermal-imaging specialist is at risk of seeing its success reverse if the current budget crisis continues.

FLIR builds technology that helps detect and track a variety of objects by looking at their heat signatures. For consumers and private-sector commercial customers, the company's technology has applications in security, boating, and certain other specialty uses. But FLIR also serves government customers, which use its products for military and security applications. It often works with contractor partners, such as Honeywell (NYSE: HON) and Northrop Grumman (NYSE: NOC), to secure business.

Growth hasn't been an issue at FLIR. The company has greatly outpaced bigger competitors like Raytheon (NYSE: RTN) and General Dynamics (NYSE: GD) in raising revenue.

Unfortunately, companies that count the U.S. Defense Department among major customers have seen some big headwinds lately. Just last week, FLIR announced its preliminary results for the second quarter that fell short of analyst expectations. In the absence of expected news, shares could keep trending downward for a while. Budget cuts could put its past growth record in jeopardy.

As a niche player, FLIR can look at the current defense-budget woes as an opportunity. If it can successfully convince government decision-makers to keep using its products, then its recent pullback may become a buying opportunity. If not, though, FLIR could fall from near-perfection very quickly.

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 FLIR Systems 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 Raytheon, Northrop Grumman, and General Dynamics. 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.