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 Rockwell Automation (NYSE: ROK) 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 Rockwell Automation.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 1.1% Fail
  1-year revenue growth > 12% 22.4% Pass
Margins Gross margin > 35% 39.8% Pass
  Net margin > 15% 10.4% Fail
Balance sheet Debt to equity < 50% 57.1% Fail
  Current ratio > 1.3 2.35 Pass
Opportunities Return on equity > 15% 34.7% Pass
Valuation Normalized P/E < 20 33.33 Fail
Dividends Current yield > 2% 1.5% Fail
  5-year dividend growth > 10% 8.8% Fail
       
  Total Score   4 out of 10

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

With just four points, Rockwell Automation falls well short of perfection. The industrial company suffered from slow growth during the recession but has seen business pick back up more recently.

Rockwell works with manufacturers to try to automate industrial processes to increase productivity. Having targeted several niches ranging from power and energy management to information solutions, the company is positioning itself toward the growth areas of the future.

But Rockwell isn't alone in its industry. It faces competition from huge players including ABB (NYSE: ABB), Siemens (NYSE: SI), and Emerson Electric (NYSE: EMR). Yet among those, none comes close to the returns on equity that Rockwell generates, and only Emerson matches Rockwell's healthy margins with ABB in close pursuit.

The trade-off, though, is that Rockwell carries a premium valuation. That's consistent with the strong results and positive guidance that the company gave investors in its most recent earnings report. But for Rockwell to reach perfection, it will have to build on its recent successes with further sales growth and further improvement on the dividend front.

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 Rockwell Automation to My Watchlist, which can find all of our Foolish analy sis 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. ABB is a Motley Fool Global Gains selection. Emerson Electric is a Motley Fool Income Investor recommendation. 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.