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 Inergy (NYSE: NRGY) 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 Inergy.


What We Want to See


Pass or Fail?

Growth 5-year annual revenue growth > 15% 8.6% Fail
  1-year revenue growth > 12% 22.2% Pass
Margins Gross margin > 35% 34.6% Fail
  Net margin > 15% 6.0% Fail
Balance sheet Debt to equity < 50% 159.9% Fail
  Current ratio > 1.3 1.39 Pass
Opportunities Return on equity > 15% 4.1% Fail
Valuation Normalized P/E < 20 61.43 Fail
Dividends Current yield > 2% 6.9% Pass
  5-year dividend growth > 10% 54.9% Pass
  Total Score   4 out of 10

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

Inergy isn't exactly drilling up perfection with a score of just four. The energy company has burst onto the scene lately, but despite its strong dividends, Inergy has some shortcomings that potential investors should take into account before jumping in.

Inergy is a master limited partnership that specializes in propane delivery to residential consumers as well as a broad range of commercial and industrial customers. Like many MLPs, Inergy has a fairly high dividend yield, and its payouts bring some tax advantages to shareholders over comparable regular dividend stocks.

But Inergy isn't alone in the propane business. Competitors Suburban Propane (NYSE: SPH), AmeriGas Partners (NYSE: APU), and Ferrellgas Partners (NYSE: FGP) all have similar operations, and although Inergy has grown faster than any of the other three, Suburban Propane and AmeriGas have produced better returns on equity and sport lower trailing multiples than Inergy does currently.

If its shares traded more cheaply, then Inergy might look a lot more like a perfect stock. But at its current valuation, Inergy has some more growth to do before it can approach perfection.

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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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.