Is Insituform Technologies the Perfect Stock?

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 Insituform Technologies (Nasdaq: INSU) 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 Insituform Technologies.

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

With a score of 3, Insituform Technologies doesn't look like it's headed for perfection anytime soon. The infrastructure company seems to be in the right place at the right time, but lately, its earnings guidance has come under question from analysts.

Insituform is an unusual company that does a tough job: keeping the pipes that deliver water and energy in good working order. Using the company's technology, utilities and municipal governments can repair damaged underground pipes without digging trenches and causing big disruptions. That's bad news for new-pipe makers ranging from giants U.S. Steel (NYSE: X) and Tenaris (NYSE: TS) to smaller companies like Northwest Pipe (Nasdaq: NWPX). But with the EPA's Office of Water Management reporting that fixing water and sewer pipes could cost more than $33 billion, Insituform has plenty of potential business going forward.

Unfortunately, local governments aren't exactly flush with cash these days, so any company that depends on municipal spending is at risk. But because money for water and sewer often comes from dedicated fees rather than general funds, Insituform isn't as exposed to municipal budget cuts as companies like trash haulers Waste Management (NYSE: WM) and Republic Services (NYSE: RSG).

Yesterday, Insituform shares dropped 6% as Oppenheimer downgraded the shares from perform to underperform. The downgrade cited "highly aggressive" guidance that could result in disappointing results going forward. Yet the stock's drop only underlines the cheap valuation for Insituform shares.

Insituform clearly makes a timely investing play. Even if short-term pressures keep the stock cheap, the potential need for future infrastructure improvements makes it more likely that Insituform will make its way closer to perfection in the years ahead.

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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."