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 Whole Foods Market (Nasdaq: WFMI) 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 Whole Foods.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 13.4% Fail
  1-Year Revenue Growth > 12% 14.2% Pass
Margins Gross Margin > 35% 34.9% Fail
  Net Margin > 15% 3.0% Fail
Balance Sheet Debt to Equity < 50% 16.2% Pass
  Current Ratio > 1.3 1.58 Pass
Opportunities Return on Equity > 15% 12.1% Fail
Valuation Normalized P/E < 20 38.52 Fail
Dividends Current Yield > 2% 0.6% Fail
  5-Year Dividend Growth > 10% (28.1%) Fail
       
  Total Score   3 out of 10

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

With a score of only 3, Whole Foods Market falls well short of perfection. The company suffered from slow growth during the recession but has seen business pick back up more recently.

In an economic environment where cost consciousness dominated all other factors, Whole Foods struggled to remain relevant. Shoppers on a budget couldn't afford the company's higher-end products, forcing growth to slow. But the grocer came out of the recession quickly once the economy began to turn around, posting promising earnings growth and establishing some much-needed momentum.

Now firmly in recovery mode, Whole Foods is trying to remain innovative. With its "Health Starts Here" initiative, it's trying to underscore the high quality of its offerings, putting both conventional grocery competitors like SUPERVALU (NYSE: SVU) and Kroger (NYSE: KR) as well as big-box entrants Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) on the defensive.

In a low-margin business, Whole Foods will probably never reach perfection, and even after restoring its dividend after a multiyear hiatus, the company will have to keep raising payouts to make income investors happy. But Whole Foods has proven detractors wrong before, and if the health craze continues, the stock could make big strides toward perfection in the years to come.

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 Whole Foods Market 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. Whole Foods Market is a Motley Fool Stock Advisor choice. Wal-Mart is a Motley Fool Inside Value, Motley Fool Global Gains, and Motley Fool Income Investor pick. Motley Fool Options has recommended buying calls on SUPERVALU and a diagonal call position on Wal-Mart. The Fool owns shares of SUPERVALU and 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.