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 Canadian National Railway (NYSE: CNI) 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 Canadian National Railway.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

2.3%

Fail
 

1-Year Revenue Growth > 12%

8.8%

Fail

Margins

Gross Margin > 35%

50.1%

Pass
 

Net Margin > 15%

27%

Pass

Balance Sheet

Debt to Equity < 50%

54.9%

Fail
 

Current Ratio > 1.3

0.89

Fail

Opportunities

Return on Equity > 15%

20.1%

Pass

Valuation

Normalized P/E < 20

19.89

Pass

Dividends

Current Yield > 2%

1.7%

Fail
 

5-Year Dividend Growth > 10%

15.2%

Pass
 
 		    
 

Total Score

  

5 out of 10

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

With a score of 5, Canadian National Railway takes investors part of the way down the tracks. The railroad company may not sound like the most exciting stock, but it has the potential for strength in a recovering world economy.

Canadian National has a vast rail network that goes from two ports on British Columbia's west coast to Halifax in Canada's Maritimes and south to the Gulf ports of New Orleans and Mobile. It has roughly the same number of miles of track as Norfolk Southern (NYSE: NSC) and CSX (NYSE: CSX), although it falls short of Union Pacific's (NYSE: UNP) size.

Railroad stocks in general have gotten a lot of attention from value investors lately. In 2009, Warren Buffett bought up Burlington Northern Santa Fe in a $44 billion deal. Then just earlier this week, hedge fund investor Bill Ackman announced that he'd taken a 12.2% stake in Canadian Pacific Railway (NYSE: CP), whose rival network spans from Vancouver to Montreal and covers several U.S. destinations as well.

As attractive as Canadian National's dividend growth appears, it actually falls short of many of its peers. CSX, Norfolk Southern, and Union Pacific all weigh in with five-year growth rates exceeding 20%, and they have higher dividend yields right now as well.

To get closer to perfection, Canadian National has to keep riding on its unique three-pronged rail network that spans the continent, connecting goods with wherever they want to go. With demand for raw materials from Canada and the U.S. still running strong and high fuel costs encouraging rail transport over alternatives, Canadian Railway has all the pieces in place to become 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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our " 13 Steps to Investing Foolishly ."