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 Infinera (Nasdaq: INFN) 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 Infinera.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 61.9% Pass
  1-year revenue growth > 12% 33.5% Pass
Margins Gross margin > 35% 46.9% Pass
  Net margin > 15% (5.4%) Fail
Balance sheet Debt to equity < 50% 0% Pass
  Current ratio > 1.3 4.62 Pass
Opportunities Return on equity > 15% (6.3%) 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 & Poor's. NM = not meaningful because of negative earnings. Total score = number of passes.

With just five points, Infinera hasn't arrived at perfection just yet. The optical networking equipment maker finds itself at a critical point in a fast-growing industry.

Infinera is an innovator in the optical space. With its photonic integration technology, Infinera lets customers be more efficient in taking advantage of their network bandwidth, both in terms of cost and equipment.

Unfortunately for shareholders, Infinera faces several challenges. Larger competitors Ciena (Nasdaq: CIEN) and Alcatel-Lucent (NYSE: ALU) have strong relationships with big telecoms like Verizon (NYSE: VZ). Moreover, the company is behind the curve in releasing top-of-the-line 100G products, with none expected until next year. 

Those concerns have hammered the stock repeatedly. Last October, optical networking stocks across the board, including Oclaro (Nasdaq: OCLR) and Oplink (Nasdaq: OPLK), plummeted as revenue growth began to slow across the broader industry. Then in January, Infinera posted lower than expected revenue as a reduction in orders from Level 3 Communications (Nasdaq: LVLT) proved to be more painful than initially thought.

Regardless of concerns, the Internet is continuing to grow, and optical networking is likely to be integral to its ongoing growth. Infinera needs to start delivering on its promises, but if it does, it could easily vault up toward perfection.

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.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Infinera. Motley Fool newsletter services have recommended buying shares of Infinera. 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.