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 Duke Energy (NYSE:DUK) 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 Duke Energy.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

6.8%

Fail

 

1-year revenue growth > 12%

18.8%

Pass

Margins

Gross margin > 35%

41.9%

Pass

 

Net margin > 15%

9.5%

Fail

Balance sheet

Debt to equity < 50%

96.6%

Fail

 

Current ratio > 1.3

1.18

Fail

Opportunities

Return on equity > 15%

5.1%

Fail

Valuation

Normalized P/E < 20

14.87

Pass

Dividends

Current yield > 2%

4.8%

Pass

 

5-year dividend growth > 10%

0.9%

Fail

       
 

Total score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Duke Energy last year, the company regained the point it lost from 2010 to 2011, thanks to a big jump in sales due to its merger with Progress Energy. Yet the stock has only managed a modest gain of about 5% over the past year.

Many investors don't expect much excitement from utilities, but recent events with Duke and its peers show otherwise. Wind energy has become an increasingly important part of utilities' power portfolios, with Duke already generating more than a gigawatt of wind power and expecting another 600 megawatts of capacity to come on line by the end of next year. Exelon (NYSE:EXC) isn't far behind with more than 900 megawatts.

But Duke hasn't given up on fossil fuels. Both it and Southern Company (NYSE:SO) are planning coal-gasification power plants, although others have backed away from such projects in light of a big drop in the cost of natural gas. With Duke joining American Electric Power (NYSE:AEP), Xcel Energy (NYSE:XEL), and many others in moving away from coal-fired plants in favor of natural gas as a fuel input, capital costs have been on the rise, but the payoff could be enormous in terms of environmental impact as well as fuel costs over the long haul.

Last week, Duke put an interesting ending on its leadership saga, announcing that CEO Jim Rogers would leave his job by the end of 2013. After a controversy involving Progress Energy's CEO Bill Johnson running Duke for exactly one day after the merger closed before stepping down in favor of Rogers, Duke appears to be trying to put the episode behind it.

For Duke to improve, it needs to integrate its Progress merger fully and concentrate on getting returns on equity up. That will require a better relationship with regulators, which the end of the CEO debacle may help foster and could lead Duke 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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Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Exelon and Southern Company. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.