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 Toyota Motor (NYSE: TM) 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 Toyota.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (0.5%) Fail
  1-Year Revenue Growth > 12% 14.1% Pass
Margins Gross Margin > 35% 13.0% Fail
  Net Margin > 15% 2.5% Fail
Balance Sheet Debt to Equity < 50% 113.4% Fail
  Current Ratio > 1.3 1.18 Fail
Opportunities Return on Equity > 15% 5.4% Fail
Valuation Normalized P/E < 20 18.14 Pass
Dividends Current Yield > 2% 1.4% Fail
  5-Year Dividend Growth > 10% 2.4% Fail
  Total Score   2 out of 10

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

Toyota only manages a score of 2. Even before the disaster in Japan, the automaker wasn't firing on all cylinders, and now it faces an even bigger challenge.

Until recently, Toyota was seen as the pinnacle of automotive quality. But the company has spent more than a year on the defensive, as it mishandled accidents linked to unintended acceleration that eventually forced it to recall millions of its vehicles and gave it a public relations nightmare.

Moreover, currency problems have hamstrung the company. Unlike Honda (NYSE: HMC), which imports only around 10% of its U.S.-sold vehicles from Japan, Toyota relies on Japanese exports of both finished vehicles and components. With the rising yen, that has given it a real disadvantage, both against Ford (NYSE: F) and General Motors (NYSE: GM) in the U.S. and against emerging-market competitors like Tata Motors (NYSE: TTM) in India.

Now, of course, the earthquake and tsunami in Japan have raised new concerns about the automaker. With many of its Japanese factories closed or below full capacity, the company is having trouble keeping its North American factories equipped with parts for production.

The biggest thing going for potential investors is that shares have fallen in the aftermath of the earthquake. But with so much uncertainty in so many different areas, it's hard to recommend the stock even as a beaten-down value play. For now, Toyota needs to settle in and revamp before it can hope to become a perfect stock.

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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