Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Baxter International (NYSE: BAX) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Baxter.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5.2% fail
  1-Year Revenue Growth > 12% 4.8% fail
Margins Gross Margin > 35% 50.8% pass
  Net Margin > 15% 12.8% fail
Balance Sheet Debt to Equity < 50% 81.6% fail
  Current Ratio > 1.3 1.81 pass
Opportunities Return on Equity > 15% 25.3% pass
Valuation Normalized P/E < 20 17.46 pass
Dividends Current Yield > 2% 2.3% pass
  5-Year Dividend Growth > 10% 14.8% pass
  Total Score   6 out of 10

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

Baxter's score of 6 stands up pretty well. Although the drug and medical device maker has grown at only a modest pace lately, its fundamentals are relatively strong and its valuation isn't too high.

Baxter doesn't have the name recognition that some of its competitors have, but it's a global company with nearly 50,000 employees worldwide. After having spun off its cardiovascular business into Edwards Lifesciences (NYSE: EW) in 2000, Baxter focused on three primary areas. Its bioscience division develops products to treat hemophilia, immune deficiencies, and other blood-related conditions. Its medication delivery and renal businesses produce medical devices for getting patients drugs and fluids, as well as home-based and inpatient dialysis.

By the numbers, though, Baxter doesn't overwhelm its competition. Abbott Labs (NYSE: ABT) sports a higher dividend and stronger recent growth. Becton, Dickinson (NYSE: BDX) has similar growth and dividends but less debt and better net margins. And Covidien (NYSE: COV) trades at a slightly more attractive valuation, with all three competitors having P/E ratios lower than Baxter's.

All in all, Baxter stands ready to benefit from the demographic tailwinds it will see as the baby boom generation ages. It's not the perfect stock, but it's a decent play for conservative investors.

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