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 Archer-Daniels-Midland (NYSE: ADM) 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 Archer-Daniels-Midland.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 13.9% Fail
  1-Year Revenue Growth > 12% 10.2% Fail
Margins Gross Margin > 35% 5.6% Fail
  Net Margin > 15% 2.8% Fail
Balance Sheet Debt to Equity < 50% 79.8% Fail
  Current Ratio > 1.3 1.57 Pass
Opportunities Return on Equity > 15% 12.6% Fail
Valuation Normalized P/E < 20 14.23 Pass
Dividends Current Yield > 2% 1.8% Fail
  5-Year Dividend Growth > 10% 12.0% Pass
       
  Total Score   3 out of 10

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

Archer-Daniels-Midland wilts in the sun with a score of 3. Although agricultural commodities have been red-hot lately, ADM has become increasingly dependent on a form of energy that many critics say makes no sense.

ADM has become an increasingly diverse company. On one hand, it's a major player in agricultural services, buying and transporting various grains and oilseeds and reselling them as a variety of intermediate products, including food products as well as feed for animals. But the company has also moved strongly into corn ethanol production, relying on government subsidies to become one of the largest ethanol producers in the country.

Yet in some ways, that diversification is biting ADM right now. With crop prices on the rise, companies like Mosaic (NYSE: MOS) and PotashCorp (NYSE: POT), which focus on helping farmers increase crop yields, are reaping big benefits as farmers can afford to spend more on fertilizer products.

But like meat producers Tyson Foods (NYSE: TSN) and Smithfield Foods (NYSE: SFD), Archer-Daniels-Midland suffers when it has to pay higher prices for the raw crops that serve as inputs to food and ethanol production. That can push margins down to sliver-thin levels, as you can see right now. Yet while ADM shares aren't ridiculously overpriced, they trade at a big premium to competitor Bunge (NYSE: BG).

Archer-Daniels-Midland is in a good industry at the right time. But unless it can start passing on its higher costs to its customers, its stock is doomed to fall short of perfection for the foreseeable future.

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 Archer-Daniels-Midland 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.