The more characteristics of high quality a stock has, the better its chance of being a market winner.
Of course, the more you demand from a stock, the fewer that may be suitable for purchase.
We recently ran a screen of stocks that match IBD's 20 Rules For Your Investment Success. The results were more than limited: Not one stock met the grade.
That doesn't mean you should forget about stock investing and seek returns elsewhere.
The truth is, stocks can fall short in one or two areas but still become successful investments. They must be purchased and sold properly and when the market is strong.
The key point: It's the degree of drawbacks that come up in a stock's analysis that has to be weighed. While there may be no such thing as a perfect stock, investors are always better off going with the stocks with the fewest blemishes.
Suppose you scan through the IBD 50 for stock ideas. The first layer of the selection process might be those companies with the best profit and , leaving aside those with lesser numbers. The next layer could be the chart, focusing on those leaders forming smooth bases.
As the research process goes deeper, more imperfections come up. Ultimately, an investor must decide which flaws are acceptable.
Research into the company's markets and financial outlook can help make those final decisions. For example, a trend of single-digit sales gains could be normal for the company's industry. A slow economic recovery may be depressing sales growth.
Don't expect a computer screen to make all those decisions for you. Critical thinking, knowledge and experience are key.
Here are three case studies of successful stocks and their flaws: Stratasys (SSYS). An investor studying the stock in April 2012 would have noticed the company's annual return on equity was 13%, below the 17% minimum for winning stocks. It was thinly traded — just 201,000 shares a day on average.
But Stratasys' sales, earnings and margins were superb. The stock broke out April 16 and soared 120% to its January peak of 92.30.
Michael Kors (KORS). The luxury clothing and accessories house went public in December 2011 boasting excellent financials.
A two-week correction was too short to be considered a proper base, even as an IPO base. But the light-volume decline marked reluctance by shareholders to sell. Kors crossed 27.68 and nearly doubled in a seven-week run.
Lumber Liquidators (LL). In April 2012, the flooring products chain had some solid earnings gains but sales growth increased no more than 18% for several quarters. Return on equity and margins weren't so great, either.
But the company was benefiting from the housing market's recovery. A April 26 led to a 130% gain until an October top.