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 NVIDIA (Nasdaq: NVDA) 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 NVIDIA.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 6.8% Fail
  1-Year Revenue Growth > 12% 8.0% Fail
Margins Gross Margin > 35% 50.7% Pass
  Net Margin > 15% 16.2% Pass
Balance Sheet Debt to Equity < 50% 0.6% Pass
  Current Ratio > 1.3 3.95 Pass
Opportunities Return on Equity > 15% 18.5% Pass
Valuation Normalized P/E < 20 22.61 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   5 out of 10

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

Since we looked at NVIDIA last year, the graphics chip maker has gained a point, boosting its return on equity more than 10 percentage points. Unfortunately for shareholders, the stock hasn't done as well, losing more than 40% over the past year.

NVIDIA is at the heart of the mobile revolution that's going on right now. With its quad-core Tegra 3 chip, the company has built a mobile processor that matches up with performance you'd expect to find in full-blown PCs. Most importantly for mobile applications, NVIDIA's chip cuts power use by more than 60%, extending battery life beyond even what Apple's (Nasdaq: AAPL) iPad delivers.

But the Tegra has created a rift in what was once a solid relationship between NVIDIA and Intel (Nasdaq: INTC). NVIDIA's graphics processor units complemented Intel CPUs, but Intel has developed new processors with integrated graphics that make GPUs less essential. Meanwhile, the fact that Tegra is based on ARM Holdings (Nasdaq: ARMH) architecture is a threat to Intel. Now, Intel's new Medfield Atom mobile chip will directly hit Tegra's target audience.

Unfortunately, recent events have hit NVIDIA. Flooding in Thailand forced the company to cut its guidance late last month. With Qualcomm (Nasdaq: QCOM) posting strong results by comparison, NVIDIA finds itself having to play catch-up.

To reach perfection, NVIDIA has to emerge as a top mover in its chip niche. That won't be easy with both Intel and Qualcomm to deal with. But so far, the company is doing well in piggybacking on the mobile revolution, and if it continues, it could see its score improve further in time.

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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Apple, QUALCOMM, and Intel. Motley Fool newsletter services have recommended buying shares of NVIDIA, Apple, and Intel, as well as creating a bull call spread position in Apple 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.