Is Rite Aid the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide whether Rite Aid (NYSE: RAD) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

• 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
• Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
• Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
• Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
• Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Rite Aid.

Source: Capital IQ, a division of Standard & Poor's. NM = not meaningful. Shareholder equity and normalized earnings were negative during the period. Total score = number of passes.

Rite Aid's score of 1 shows just how big a struggle the drug store retailer has had in recent years. Its main problem is debt, more than $6 billion of it, which is substantially greater than the company's $4.3 billion in total capital. In contrast, competitors Walgreen (NYSE: WAG) and CVS Caremark (NYSE: CVS) have much healthier balance sheets, with respectable debt-to-equity ratios of 0.17 and 0.33, respectively.

Few see any relief coming soon. Analysts expect losses to continue both this year and next. If today's low interest rates can't help Rite Aid solve its debt problems, it's unclear what will.

Granted, drug stores aren't known for their exciting growth; even emerging-market upstart China Nepstar (NYSE: NPD) has only single-digit revenue growth over the past three years. But investors looking for something other than a lottery ticket would do well to avoid Rite Aid shares unless the company can solve its long-term woes.

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.

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