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 3D Systems (NYS: DDD) 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 3D Systems.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 14.4% Fail
  1-Year Revenue Growth > 12% 47.3% Pass
Margins Gross Margin > 35% 49.3% Pass
  Net Margin > 15% 10.3% Fail
Balance Sheet Debt to Equity < 50% 36.6% Pass
  Current Ratio > 1.3 3.73 Pass
Opportunities Return on Equity > 15% 9.8% Fail
Valuation Normalized P/E < 20 83.92 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   4 out of 10

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

With four points, 3D Systems doesn't quite make it to the middle of the pack on our 10-point scale. But investors couldn't be more optimistic about the company's growth prospects, with its shares having more than doubled over the past year.

3D Systems is at the forefront of a new cutting-edge technology: 3-D printing. Along with rival Stratasys (NAS: SSYS) , which has also seen its stock skyrocket, 3D Systems allows its customers to make specialized products much more rapidly than shipping them from remote locations.

But 3D Systems isn't impervious to the slowdown in the economy. During better times, a list of clients that includes defense contractor Northrop Grumman (NYS: NOC) and automaker Ford (NYS: F) would be an unambiguous mark of success. But Northrop is dealing with the potential for slimmed-down defense budgets, and Ford is still navigating the impact of global macroeconomic trends on the auto industry. As a result, 3D Systems has to be concerned that its industrial clients, which will almost certainly represent a higher-margin opportunity than more consumer-oriented applications, won't have the financial strength to invest in 3-D technology.

The challenge that 3D Systems faces is figuring out how to avoid letting 3-D printing turn into a commodity business. That's what has crushed the traditional 2-D printer industry, with Hewlett-Packard (NYS: HPQ) struggling to figure out a new direction that will let it escape the margin compression that competition from Lexmark and other printer competitors brought.

For 3D Systems to improve, it needs to focus first on beating Stratasys. Once that's done, higher margins and stronger returns on equity should let 3D Systems get a lot closer to perfection in short order.

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.

3D Systems may need Ford, but Ford definitely needs the innovations that 3D Systems and others can bring to the auto industry. Get an in-depth look at the automaker in the Fool's premium report on Ford, which includes high-density analysis on the stock's prospects and potential obstacles. Get your copy today and find out what you need to know.

Click here to add 3D Systems to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Is 3D Systems the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Northrop Grumman and Ford. Motley Fool newsletter services have recommended buying shares of Ford, Stratasys, and 3D Systems, as well as creating a synthetic long position in Ford. 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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