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 Mead Johnson Nutrition (NYSE: MJN) 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 Mead Johnson Nutrition.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 9.4% Fail
  1-Year Revenue Growth > 12% 11.6% Fail
Margins Gross Margin > 35% 62% Pass
  Net Margin > 15% 14.6% Fail
Balance Sheet Debt to Equity < 50% NM NM
  Current Ratio > 1.3 1.60 Pass
Opportunities Return on Equity > 15% NM NM
Valuation Normalized P/E < 20 28.27 Fail
Dividends Current Yield > 2% 1.6% Fail
  5-Year Dividend Growth > 10% 0%* Fail
       
  Total Score   2 out of 8

Source: S&P Capital IQ. NM = not meaningful due to negligible shareholder equity. Total score = number of passes. *Since first dividend in July 2009.

Since we looked at Mead Johnson Nutrition last year, the company has dropped a point, as revenue growth slowed in the past 12 months. Moreover, the stock has managed to eke out only a tiny gain in a generally up market over the past year.

Mead Johnson makes baby formula and other children's nutritional products. Its Enfamil brand is a familiar name among new parents, and the company has global scope.

But Mead Johnson suffered a big scare in the past year. Late last December, a 10-day-old infant died after taking Enfamil, and shares dropped sharply as a result as major retailers pulled formula from their shelves. After inspection, however, the FDA concluded that the batch of formula was free of bacteria and other harmful contents.

The longer-term threat to Mead Johnson, though, comes from strong competition. Earlier this year, Pfizer (NYSE: PFE) sold its infant nutrition business to Nestle, which submitted a higher bid than a group that included Mead Johnson. Moreover, Abbott Labs (NYSE: ABT) is splitting itself into two parts, with one part focusing directly on nutritional offerings that include Ensure, Pedialyte, and Similac, directly competing against Mead Johnson's products. Perrigo (Nasdaq: PRGO) also makes store-brand formulas and other nutritional products.

For Mead Johnson to improve, it needs to keep struggling to find avenues for growth. Yet in a competitive atmosphere, that won't be easy. Unless it can find innovative ways to expand, Mead Johnson will have a tough time growing toward perfection.

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 the best investments from the rest.

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