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 Perrigo (NYSE:PRGO) 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 Perrigo.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

16.6%

Pass

 

1-year revenue growth > 12%

13.3%

Pass

Margins

Gross margin > 35%

35.8%

Pass

 

Net margin > 15%

13.6%

Fail

Balance sheet

Debt to equity < 50%

70.6%

Fail

 

Current ratio > 1.3

3.02

Pass

Opportunities

Return on equity > 15%

24.4%

Pass

Valuation

Normalized P/E < 20

28.57

Fail

Dividends

Current yield > 2%

0.3%

Fail

 

5-year dividend growth > 10%

12.3%

Pass

       
 

Total score

 

6 out of 10

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

Since we looked at Perrigo last year, the company has added a point, with gross margins climbing slightly. The stock's performance has been reasonably good, with Perrigo posting about a 10% gain over the past year.

Perrigo makes generic drugs. That's been a lucrative market especially in the past year or two, as some massive blockbuster drugs have come off-patent, making them available for generic-makers to duplicate and sell. Yet Perrigo definitely doesn't have the market to itself, with giant Teva Pharmaceutical (NYSE:TEVA) and quick-growing Watson Pharmaceuticals (NYSE:AGN) being just a couple of its main competitors.

Still, Perrigo combines several favorable traits. It has a huge pipeline, with dozens of drugs submitted to the Food and Drug Administration for review, and has released approved versions at a respectable pace. For instance, in October, it got FDA approval for a drug similar to GlaxoSmithKline's (NYSE:GSK) Nicorette to help smokers quit. Moreover, its margins are top-notch, with the company topping Teva's formerly industry-leading profit margin over the past year despite Teva's huge size advantage.

One area of controversy involves so-called "pay for delay" arrangements that help Perrigo earn some extra revenue. In November, Perrigo settled lawsuits with Cadence Pharmaceuticals (NASDAQ:CADX) to put off marketing a generic version of its Ofirmex drug in exchange for rights to market an authorized generic in about seven years. Some believe the arrangements are anticompetitive, and the Supreme Court is expected to take up the antitrust issues this year.

For Perrigo to improve, it needs to get margins up just a bit further and then focus on getting debt paid down. Mix that with richer dividends, and Perrigo could look a lot more like a perfect stock in the near future.

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 GlaxoSmithKline. 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.