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 CME Group (NASDAQ:CME) 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 CME Group.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

10.7%

Fail

 

1-year revenue growth > 12%

(11.2%)

Fail

Margins

Gross margin > 35%

97.2%

Pass

 

Net margin > 15%

30.8%

Pass

Balance sheet

Debt to equity < 50%

13.3%

Pass

 

Current ratio > 1.3

1.14

Fail

Opportunities

Return on equity > 15%

4.2%

Fail

Valuation

Normalized P/E < 20

20.33

Fail

Dividends

Current yield > 2%

2.9%

Pass

 

5-year dividend growth > 10%

21.1%

Pass

       
 

Total score

 

5 out of 10

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

Since we looked at CME Group last year, the company has lost two points, as a big contraction in revenue and rising earnings multiples have led to the score drop. The stock hasn't done too badly, but it's up only 5% over the past year.

CME Group is a leader in the securities exchange industry, commanding the commodities exchange niche with the combined power of the Chicago Mercantile Exchange and the Chicago Board of Trade. Recently, it bought out the Kansas City Board of Trade, adding to its agricultural product line, and also obtaining lucrative real estate that it's now considering selling.

But competitive moves within the exchange industry have put CME Group somewhat on the defensive. Last December, IntercontinentalExchange agreed to buy NYSE Euronext for $8 billion, boosting its presence not just in the U.S. stock market, but also to obtain NYSE-owned derivatives market Liffe.

Moreover, the entire industry still suffers to some extent from the fallout of the MF Global scandal. Despite having worked with the Commodity Futures Trading Commission to pass new regulations last summer covering customer funds, it's unclear whether customers are any more secure about trading.

For CME to improve, it needs to demonstrate its ability to compete with the Intercontinental/NYSE combined entity. Given the big hit to revenue that it has taken over the past year, CME has an uphill road before it will get back 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 out the best investments from the rest.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends NYSE Euronext. The Motley Fool owns shares of CME Group. 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.