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 and then decide whether Digital River (NAS: DRIV) 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.
  • Moneymaking 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 Digital River.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

4.1%

Fail

 

1-Year Revenue Growth > 12%

7.3%

Fail

Margins

Gross Margin > 35%

84%

Pass

 

Net Margin > 15%

3.7%

Fail

Balance Sheet

Debt to Equity < 50%

57.6%

Fail

 

Current Ratio > 1.3

3.26

Pass

Opportunities

Return on Equity > 15%

2.2%

Fail

Valuation

Normalized P/E < 20

32.56

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

2 out of 10

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

Since we looked at Digital River last year, the company hasn't improved on its 2-point score. Shareholders have also taken a big hit, with the stock down 40% over the past year.

Digital River has tried to make a splash in the cloud computing space, with a focus on helping businesses build a presence on the Internet by creating online stores and payment-acceptance systems. Given the growing popularity of online shopping, the company clearly has a huge potential market to tap.

But over the past year, Digital River has given investors repeated disappointments. Back in May, the stock sank when the company said weak international demand and higher costs would bring earnings down further than analysts had expected during the second quarter. Three months later, Digital River came back with a dour full-year outlook, raising questions about whether its partnership with Microsoft (NAS: MSFT) will be as positive as many have hoped.

Still, Digital River is trying to move forward. Its agreement in September to buy LML Payment Systems (NAS: LMLP) for $103 million will give it access to customers including Capital One (NYS: COF) , Wells Fargo (NYS: WFC) , and JPMorgan Chase, among many other smaller banks and financial institutions.

For Digital River to improve, it needs to find ways to differentiate itself from other companies offering business-to-business solutions on the technological front. Until it finds that magic formula, Digital River isn't likely to make much headway toward becoming a perfect stock anytime soon.

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.

Microsoft's partnership with Digital River is just one aspect of the software giant's overall strategy. It's been a frustrating path for Microsoft investors, though, who've watched their company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. Could it finally be time to buy Microsoft now? In this brand new premium report on Microsoft our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.

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

The article Has Digital River Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger owns warrants on Wells Fargo and JPMorgan Chase. The Motley Fool owns shares of Microsoft and Wells Fargo. Motley Fool newsletter services recommend Digital River, Microsoft, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley 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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