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 Kellogg (NYSE: K) 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 Kellogg.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 4% Fail
  1-Year Revenue Growth > 12% (1.3%) Fail
Margins Gross Margin > 35% 42.5% Pass
  Net Margin > 15% 9.5% Fail
Balance Sheet Debt to Equity < 50% 260% Fail
  Current Ratio > 1.3 0.89 Fail
Opportunities Return on Equity > 15% 50.1% Pass
Valuation Normalized P/E < 20 19.41 Pass
Dividends Current Yield > 2% 2.8% Pass
  5-Year Dividend Growth > 10% 7.9% Fail
       
  Total Score   4 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Kellogg's score of 4 doesn't show any obvious elfin magic. The processed food manufacturer has had to deal with strong headwinds from adverse cost trends that are clamping down on sales and margins.

Kellogg is well known for its cereals. But it also has a thriving snack business, with offerings including Pop-Tarts, Nutri-Grain bars, and Eggo waffles. Cereal and snacks make up about 90% of its business.

Like competitors Kraft Foods (NYSE: KFT), Ralcorp (NYSE: RAH), and General Mills (NYSE: GIS), Kellogg has faced concerns about food price inflation, which hits processed-food makers in the form of higher costs. Yet even with those challenges, Kellogg's investment in building brand recognition has helped it keep gross margins higher than its competitors and beats out all but General Mills on the net margin front.

Perhaps the most troublesome thing about Kellogg is its big debt load. Despite the high debt-to-equity ratio, though, the company has a healthy interest coverage ratio yet still manages to pay out a 2.8% dividend yield. And with borrowing rates low, Kellogg has plenty of time to rein in its debt before it can cause big problems.

Processed food may not be the highest-growth business in the world. But for those looking to keep risk to a minimum with high-profile blue-chip stocks, Kellogg may be a balanced part of a nutritious portfolio.

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.

Add Kellogg to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended Kellogg. 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 Fool has a disclosure policy.