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 Quality Systems (Nasdaq: QSII) 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 Quality Systems.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 23.9% Pass
  1-Year Revenue Growth > 12% 24.9% Pass
Margins Gross Margin > 35% 65.6% Pass
  Net Margin > 15% 19% Pass
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 2.39 Pass
Opportunities Return on Equity > 15% 32.1% Pass
Valuation Normalized P/E < 20 27.96 Fail
Dividends Current Yield > 2% 2% Pass
  5-Year Dividend Growth > 10% 7% Fail
  Total Score   8 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With a score of eight, Quality Systems comes pretty close to perfection already. But the company's shares have taken a huge tumble in recent months, losing nearly a third of their value since late September.

Quality Systems serves the health-care industry with its health information systems. By streamlining communication among providers, Quality Systems attempts to make it easier for medical professionals to serve patients more efficiently and effectively. Along with peers like Athenahealth (Nasdaq: ATHN) and Allscripts Healthcare (Nasdaq: MDRX), Quality Systems benefited from government stimulus money and its push toward electronic medical records.

However, Quality Systems faces a lot of competition. For instance, in October, a Deutsche Bank analyst picked peer MedAssets (Nasdaq: MDAS) as its top pick over other health-care tech companies including Cerner (Nasdaq: CERN), Computer Programs & Systems (Nasdaq: CPSI), and Quality Systems, all of which reported disappointing earnings in Deutsche Bank's view.

Overall, though, Quality Systems has given investors most of what they want: strong growth, a healthy balance sheet, and good dividends. With founder Sheldon Razin maintaining a big insider stake, you can expect good treatment for shareholders for the foreseeable future. Even though Quality Systems falls a little short of perfection, it still looks like a strong pick -- especially if it can develop a competitive advantage over its peers.

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 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.