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 Affymetrix (Nasdaq: AFFX) 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 Affymetrix.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (3.6%) Fail
  1-Year Revenue Growth > 12% (7.4%) Fail
Margins Gross Margin > 35% 58.2% Pass
  Net Margin > 15% (0.2%) Fail
Balance Sheet Debt to Equity < 50% 32.2% Pass
  Current Ratio > 1.3 3.92 Pass
Opportunities Return on Equity > 15% (0.2%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   3 out of 9

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Affymetrix had negative earnings during the period. Total score = number of passes.

With just three points, Affymetrix hasn't yet discovered the secret of perfection. The company is involved in a groundbreaking business, but its recent financial results have been disappointing.

Affymetrix makes products that help researchers perform genetic tests via DNA coding. Years ago, its GeneChip platform started helping researchers detect potentially life-threatening conditions without the need for biopsies or other. less-subtle detection methods. But when management couldn't turn that promising technology into business success, rival Illumina (Nasdaq: ILMN) swooped in to take advantage of the opportunity. Now, Illumina and Life Technologies (Nasdaq: LIFE) dominate the DNA sequencing market, while up-and-comer Pacific Biosciences (Nasdaq: PACB) waits in the wings.

Earlier this year, things started looking up for Affymetrix. The company announced a distribution deal with Thermo Fisher Scientific (NYSE: TMO) for its GeneAtlas System that looked as if it would expand Affymetrix's share of the research market.

Unfortunately, Affymetrix hasn't been able to meet its own expectations when it comes to turning its promise into revenue. Just yesterday, the company announced that revenue would fall more than 10% short of what analysts had expected, and shares fell almost 18% in response.

Although the company is cash-flow positive and therefore won't fall into the dilution trap that plagues so many small-cap companies, investors won't take it seriously until it achieves consistent profitability. Affymetrix isn't a perfect stock, and without a big turnaround, it may never become one.

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 Affymetrix 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. Motley Fool newsletter services have recommended buying shares of Pacific Biosciences, Thermo Fisher Scientific, and Illumina. 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.