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 II-VI (Nasdaq: IIVI) 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 II-VI.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 16.6% Pass
  1-Year Revenue Growth > 12% 62.5% Pass
Margins Gross Margin > 35% 40.8% Pass
  Net Margin > 15% 15.8% Pass
Balance Sheet Debt to Equity < 50% 0.7% Pass
  Current Ratio > 1.3 3.98 Pass
Opportunities Return on Equity > 15% 17.5% Pass
Valuation Normalized P/E < 20 29.50 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   7 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

With a score of 7, II-VI beats both numerals in its name. The company has been flying high on strong earnings lately and has the fundamentals to back up its strong performance here.

II-VI has an interesting combination of businesses. Its optical components get used in a variety of laser-related applications, ranging from precision cutting and drilling to early warning missile detection. With additional military products, the company serves defense contractors including Northrop Grumman (NYSE: NOC) and Raytheon (NYSE: RTN). In addition, II-VI makes semiconductor substrate from which other equipment makers can create their own products.

But as Rising Star Portfolio player Rex Moore points out, with such a wide range of businesses, the company also faces plenty of competition. Cree (Nasdaq: CREE) and the Dow Corning joint venture between Dow Chemical (NYSE: DOW) and Corning (NYSE: GLW) are just two of the companies that keep II-VI investors nervous.

But so far, II-VI is doing everything right. Last month, the company crushed analyst earnings estimates, largely because of an acquisition of one of its smaller competitors. And with increased guidance for the year, II-VI rewarded shareholders with a more than 20% pop.

II-VI's business is cyclical, and with concerns about defense spending, there's always the chance that the good times could slow down for the company. But with the important niche that II-VI fills, there should always be demand for its products -- making the shares worth considering even at a somewhat lofty current valuation.

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 II-VI 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, II-VI, and Northrop Grumman. Motley Fool newsletter services have recommended buying shares of II-VI. 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.