Is iRobot the Perfect Stock?

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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 iRobot (NAS: IRBT) 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:

With those factors in mind, let's take a closer look at iRobot.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-year annual revenue growth > 15%19.7%Pass
 1-year revenue growth > 12%13.3%Pass
MarginsGross margin > 35%39%Pass
 Net margin > 15%7%Fail
Balance sheetDebt to equity < 50%0%Pass
 Current ratio > 1.33.59Pass
OpportunitiesReturn on equity > 15%16.5%Pass
ValuationNormalized P/E < 2035.33Fail
DividendsCurrent yield > 2%0%Fail
 5-year dividend growth > 10%0%Fail
    
 Total Score 6 out of 10

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

With six points, iRobot is vacuuming up some good financials. The company's two very different businesses complement each other fairly well, although some storm clouds may be on the horizon.

iRobot uses its technology to create some very different products. On the home consumer side, the company's Roomba robot vacuum cleaner navigates its way across rooms to clean them without human assistance. But the company also applies its self-directing robots to defense applications such as bomb disposal. As such, the company has worked both with the U.S. military directly as well as through defense contractors such as Boeing (NYS: BA) and Lockheed Martin (NYS: LMT) .

The consumer uses for iRobot's technology have big growth potential. An open-source architecture the company is working on could help developers make software applications that can make the robots more useful. With compatibility with both Apple (NAS: AAPL) and Google (NAS: GOOG) operating systems, iRobot could benefit from the innovation of app developers to find new uses for its products.

Over the past couple of quarters, though, some warning signs have come up. In the first quarter of 2011, iRobot saw its free cash flow turn negative, with a big boost in inventory levels raising concerns for shareholders despite growth in sales and net income. Then last week, the company again reported excellent revenue and profit growth, but receivables spiked upward , and free cash flow remained negative.

iRobot is a fascinating company. If it can realize its full potential, it has a chance to reach perfection, but it has to make sure it keeps a handle on its finances first.

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 hereto add iRobot 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 our13 Steps to Investing Foolishly.

At the time this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article.The Motley Fool owns shares of Lockheed Martin, Apple, and Google.Motley Fool newsletter serviceshave recommended buying shares of iRobot, Apple, and Google, as well as creating a bull call spread position in Apple. 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 adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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