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 Diana Shipping (NYSE: DSX) 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 Diana Shipping.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 22.3% Pass
  1-Year Revenue Growth > 12% 18.4% Pass
Margins Gross Margin > 35% 77.0% Pass
  Net Margin > 15% 47.1% Pass
Balance Sheet Debt to Equity < 50% 31.6% Pass
  Current Ratio > 1.3 14.84 Pass
Opportunities Return on Equity > 15% 12.2% Fail
Valuation Normalized P/E < 20 10.35 Pass
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
  Total Score   7 out of 10

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

With seven points, Diana Shipping delivers some pretty solid results. The company has gone through a terrible time in the dry bulk shipping industry, but its conservative management team has helped it navigate through rough waters so far.

The best sign of a strong leader is the willingness to admit when challenges are coming, and no company was more forthright about trouble than the folks at Diana Shipping. More than two years ago, President Anastasios Margaronis said the huge oversupply of new vessels, along with the need to finance them, could create a "wave of destruction for banks to rival the subprime crisis." Margaronis reiterated his concerns just two months ago, arguing that continuing bad conditions would eventually cause problems for the industry.

Perhaps because of that awareness of what's going on in its business, Diana is a somewhat safer play than some of its rivals. Excel Maritime Carriers (NYSE: EXM) and Eagle Bulk Shipping (Nasdaq: EGLE) posted losses in the first quarter and Genco Shipping & Trading (NYSE: GNK) has had to resort to expansion in order to stay profitable.

Diana's saving grace is its lack of debt. Compared to DryShips (Nasdaq: DRYS) at 72% debt to equity, and Navios Maritime Holdings (NYSE: NM) at a whopping 127%, Diana's 32% figure is quite restrained and gives the company flexibility that competitors don't have -- especially if a European debt crisis were to restrict access to credit markets.

Diana has done a great job making the most of a hard situation. If the industry can get through its glut of vessels, then Diana might well take the last steps toward perfection in the years to come.

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 Diana Shipping 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. 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.