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 Arena Pharmaceuticals (NASDAQ:ARNA) 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 Arena Pharmaceuticals.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

7.3%

Fail

 

1-year revenue growth > 12%

89.2%

Pass

Margins

Gross margin > 35%

83%

Pass

 

Net margin > 15%

NM

NM

Balance sheet

Debt to equity < 50%

63.8%

Fail

 

Current ratio > 1.3

9.34

Pass

Opportunities

Return on equity > 15%

(115.3%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

3 out of 8

Source: S&P Capital IQ. NM = not meaningful due to substantial negative earnings in excess of revenue. Total score = number of passes.

Since we looked at Arena Pharmaceuticals last year, the company has gotten back the point it lost from 2011 to 2012, as revenue growth perked up. But shareholders couldn't be happier, as the stock has climbed more than 400% over the past year.

The big news for Arena in 2012 was the Food and Drug Administration's approval of its Belviq anti-obesity drug over the summer. Unfortunately for the company, though, the Drug Enforcement Agency has to provide a classification for the drug before Belviq can become available to patients. That delay has allowed VIVUS (NASDAQ:VVUS) and its rival Qsymia drug to get a jump on Arena, but Arena has set up a better distribution and marketing network and should be able to get approval in Europe -- something that eluded Qsymia.

But Arena could soon face even more competition beyond VIVUS. The FDA forced Orexigen (NASDAQ:OREX) to run an additional trial of its Contrave obesity drug to test for heart risks, and with that trial slated to provide interim results as early as this year's second quarter, positive results could mean another entrant into the growing space. In addition, Amgen (NASDAQ:AMGN) has had some success with a fat-fighting antibody that could eventually evolve into an obesity drug.

For Arena to improve, it needs to get its Belviq launch off to a good start. With pre-approved status from health insurer Aetna (NYSE:AET), the company should avoid problems that other start-ups have had in launching sales of new products. That'll give Belviq the best chance to maximize profits for Arena when it becomes available.

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.

Click here to add Arena Pharmaceuticals to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.