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 Zoltek (NAS: ZOLT) 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 Zoltek.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 8.4% Fail
  1-Year Revenue Growth > 12% 22.5% Pass
Margins Gross Margin > 35% 20.1% Fail
  Net Margin > 15% 9.2% Fail
Balance Sheet Debt to Equity < 50% 3.4% Pass
  Current Ratio > 1.3 4.88 Pass
Opportunities Return on Equity > 15% 5.5% Fail
Valuation Normalized P/E < 20 29.88 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10%                     0% Fail
       
  Total Score   3 out of 10

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

Since we looked at Zoltek last year, the company has lost a point. Although the company has returned to profitability, slower growth hurt its score, and a 25% drop in its stock price over the past year hasn't made investors very happy either.

Wind energy has seen strong growth in recent years, with big conglomerates General Electric (NYS: GE) and Siemens (NYS: SI) turning a major part of their focus to alternative energy in general and wind turbine production in particular. That increase in demand has led to greater interest in companies like Zoltek that help produce the components necessary for wind energy.

Specifically, Zoltek makes carbon fiber that it then uses to manufacture wind turbine blades. A big chunk of those blades end up sold to Vestas Wind, which has the world's highest turbine-production market share. Zoltek hopes to see 15%-25% annual growth in its turbine segment over the next 10 years.

Recent results suggest that may be possible. In its most recent quarter, Zoltek saw a 27% increase in revenue, and the company expects a record 2012 as it returns to profitability.

But energy isn't the only growth driver that Zoltek's pursuing. It recently announced an agreement with Magna International (NYS: MGA) to boost the use of carbon fiber in auto parts. Just as aluminum-maker Alcoa (NYS: AA) has struggled from the threat that carbon fiber poses to its lightweight metal production, Zoltek stands to gain from the trend toward carbon fiber.

For Zoltek to keep improving, it needs to sustain its profitability while finding ways to boost its own investment returns. Whether that comes from wind, automotive components, or some other area entirely, Zoltek could be at the start of a powerful uptrend if it can execute on its strategy going forward.

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.

If you think energy is the place to be, we've got a stock idea that could knock your socks off. Read about it right here in The Motley Fool's special free report on the energy industry and its best prospects -- it's free but only available for a limited time, so click here today.

Click here to add Zoltek to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. 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.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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