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 Alaska Air (NYSE: ALK) 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 Alaska Air.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5.3% Fail
  1-Year Revenue Growth > 12% 13.8% Pass
Margins Gross Margin > 35% 30.5% Fail
  Net Margin > 15% 8.1% Fail
Balance Sheet Debt to Equity < 50% 123.5% Fail
  Current Ratio > 1.3 1.08 Fail
Opportunities Return on Equity > 15% 31.1% Pass
Valuation Normalized P/E < 20 7.61 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   3 out of 10

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

With just three points, Alaska Air isn't flying very high. Given the troubles that most airlines face, however, Alaska Air has held up reasonably well lately.

For years, the airline industry has gone through episode after episode of turmoil. During 2007 and 2008, soaring fuel costs threatened the whole industry's viability.

Lately, though, even fee income hasn't been enough to help the airlines. Because of the latest cycle of high oil prices, JetBlue (Nasdaq: JBLU) just barely turned a profit on the back of adding still higher fees on checked bags and premium seating. The recently merged United Continental (NYSE: UAL) has thus far been a big disappointment, with soaring fuel costs on top of expenses related to the merger forcing the company to cut back on planned expansion.

Yet Alaska Air followed a playbook that longtime industry darling Southwest Airlines (NYSE: LUV) used to use to perfection: fuel-cost hedging. With Alaska hedging so much that it earned a profit from the practice, it was beating expectations even when Southwest had almost all of its profit eaten up by energy costs. And with Alaska's focus on its niche in the northwestern U.S., it has an advantage that larger carries Delta Air Lines (NYSE: DAL) and US Airways (NYSE: LCC) don't: the ability to adapt to changing conditions in the markets they serve.

Alaska still suffers from the highly capital-intensive nature of airlines. But with net margins that put the rest of the industry to shame, Alaska may just be the closest to perfection you'll ever find from an airline 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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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.