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 AllianceBernstein (NYSE: AB) 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 AllianceBernstein.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (6.8%) fail
  1-Year Revenue Growth > 12% 14.8% pass
Margins Gross Margin > 35% 100% pass
  Net Margin > 15% 84.2% pass
Balance Sheet Debt to Equity < 50% 0% pass
  Current Ratio > 1.3 NM* pass
Opportunities Return on Equity > 15% 8.8% fail
Valuation Normalized P/E < 20 21.94 fail
Dividends Current Yield > 2% 1.97% fail
  5-Year Dividend Growth > 10% (11.6%) fail
  Total Score   5 out of 10

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; *company has no significant current assets or current liabilities. Total score = number of passes.

AllianceBernstein scores a 5, which leaves it well short of perfect. The asset manager has gone through more than its share of troubles, and even a nice stock market rebound hasn't turned into profit growth just yet.

To many, money managers seem like a no-lose proposition as an investment. Whether the market goes up or down, companies like AllianceBernstein keep collecting management fees. The rub, though, is that those fees are typically based on assets under management. So when the market crashes as it did in 2008, managers suffer along with their customers.

Still, you'd expect that with the market back up, growth would return. But while revenue has jumped 30% or more in the past year for competitors T. Rowe Price (Nasdaq: TROW) and Franklin Resources (NYSE: BEN), AllianceBernstein is stuck with less than 15% growth, leaving it solidly in the red since 2005.

Moreover, while its competitors have increased their dividends, AllianceBernstein has had to slash its payout. And unlike Legg Mason (NYSE: LM) and Blackstone Group (NYSE: BX), which have made substantial share repurchases recently, AllianceBernstein has actually been a net seller of its own stock.

All in all, despite a decent score, AllianceBernstein leaves a lot to be desired. Investors seeking perfection would be better served looking to other asset managers.

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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Fool owns shares of Legg Mason and T. Rowe Price. Try any of our Foolish newsletters today, free for 30 days. 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.