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 Stage Stores (NYSE: SSI) 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 Stage Stores.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 1.8% Fail
  1-Year Revenue Growth > 12% 2.7% Fail
Margins Gross Margin > 35% 28.3% Fail
  Net Margin > 15% 2.6% Fail
Balance Sheet Debt to Equity < 50% 7.9% Pass
  Current Ratio > 1.3 2.47 Pass
Opportunities Return on Equity > 15% 7.9% Fail
Valuation Normalized P/E < 20 18.54 Pass
Dividends Current Yield > 2% 1.7% Fail
  5-Year Dividend Growth > 10% 49.0% Pass
       
  Total Score   4 out of 10

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

Stage Stores falls short with a score of 4. Despite facing many of the same challenges that other retailers deal with, Stage Stores has posted some impressive results lately.

Stage Stores is the company behind specialty retailers like Bealls, Peebles, and Goody's. In contrast to larger retailers like Target (NYSE: TGT) and Wal-Mart (NYSE: WMT), Stage Stores aims to give small and mid-sized communities access to more fashionable merchandise while giving customers in major metropolitan areas better customer service in a smaller, more convenient store setting. In that sense, the company's strategy mirrors what discount retailers like Family Dollar (NYSE: FDO) have done to compete against Wal-Mart and Target.

Stage's model has been somewhat successful. In its most recent quarter, Stage Stores announced higher-than-expected earnings. But although the stock rose on its guidance, the company expects just 1% to 3% same-store sales growth in 2011.

One mistake Stage Stores may be making is trying to be all things to all people. In an exhibit to its performance-based compensation agreements included in its annual report, the company named not only discount-oriented TJX (NYSE: TJX) but also high-end retailers Nordstrom (NYSE: JWN) and Polo Ralph Lauren (NYSE: RL) as part of its peer group .

The low margins and slow growth that Stage Stores has seen aren't unique to the company; they're largely a general retail phenomenon. If the company is successful in its strategy of catering to an underserved customer base, then it could see its financials improve quickly. For now, though, a wait-and-see approach appears to make the most sense.

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 Stage Stores 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 Options has recommended a diagonal call position on Wal-Mart, which is a Motley Fool Inside Value and Motley Fool Global Gains pick. The Fool owns shares of Wal-Mart. 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.