Is Ritchie Bros. Auctioneers the Perfect Stock?

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 Ritchie Bros. Auctioneers (NYSE: RBA) 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 Ritchie Bros. Auctioneers.

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

With a score of four, Ritchie Bros. Auctioneers isn't getting all the bids shareholders would like to see. The auction company saw its stock jump on hopes of a recovery earlier this year, but the recent market swoon has hit Ritchie hard.

As its name suggests, Ritchie provides auction services. Unlike online bidding services like eBay (Nasdaq: EBAY) or live-bidding specialist Sotheby's (NYSE: BID), however, Ritchie auctions off industrial equipment like tractors, trucks, and cranes that farmers and other businesses use. Ritchie is by far the biggest player in its industry, and after a tough time during the credit crisis, the company has seen some of its business return.

In the company's third-quarter results, Ritchie wasn't able to deliver as much as investors wanted to see. Earnings missed estimates by a whopping $0.08 per share, leading to an intraday plunge yesterday that quickly gave way to a recovery for the stock. That earnings miss continues a trend from the previous quarter, but one possible offsetting factor may be that the company apparently had a good October, with CEO Peter Blake saying gross auction proceeds were up more than 55% from year-ago levels.

Paradoxically, one possible reason for the shortfalls may have to do with the success of farmers recently. With crop prices high, companies like Deere (NYSE: DE) and Caterpillar (NYSE: CAT) have seen their revenues soar through the roof in the past year, as have fertilizer companies Mosaic (NYSE: MOS) and PotashCorp (NYSE: POT). When farmers can afford new equipment -- and get financing for it -- then buying cheaper at auction isn't necessarily the best long-term deal.

To reach perfection, Ritchie will have to wait for a return to more normal conditions in the agriculture industry. Once excess profits have worked their way out of the system, Ritchie should see more stable demand for its auction inventory -- and thereby produce the stronger growth it needs.

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 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 ."