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 Windstream (Nasdaq: WIN) 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 Windstream.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 3.8% fail
  1-Year Revenue Growth > 12% 15.4% pass
Margins Gross Margin > 35% 62.7% pass
  Net Margin > 15% 9% fail
Balance Sheet Debt to Equity < 50% 1093.8% fail
  Current Ratio > 1.3 0.82 fail
Opportunities Return on Equity > 15% 77.9% pass
Valuation Normalized P/E < 20 17.54 pass
Dividends Current Yield > 2% 7.3% pass
  5-Year Dividend Growth > 10% (4.7%) fail
  Total Score   5 out of 10

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

Windstream falls right in the center of the scale with a score of 5. Although the rural telecom company has been a favorite among dividend-hungry investors for quite a while, it has shortcomings that keep it from being the perfect stock.

Like its competitors, Windstream struggles with the fact that as lucrative as its old-style landline business is, there's little growth left in it. When you compare Windstream against the similar companies Frontier Communications (NYSE: FTR) and CenturyLink (NYSE: CTL), Windstream comes up with the lowest long-term sales growth rate of the three. But don't let that mislead you: Frontier has goosed growth by buying assets from Verizon (NYSE: VZ), while CenturyLink has made past acquisitions and intends to gulp down Qwest (NYSE: Q) in the near future.

Also troubling is Windstream's high debt. Low interest rates have probably helped make it easier for the company to stay on course with debt payments, but any change there could create problems that would eventually endanger the dividend.

For now, though, investors have enjoyed the combination of strong dividends and steadily rising prices. Windstream may not be perfect, but those who bought shares in the past year may well think it is.

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

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.