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 Rock-Tenn (NYSE: RKT) 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 Rock-Tenn.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 9.7% Fail
  1-Year Revenue Growth > 12% 9.7% Fail
Margins Gross Margin > 35% 23.2% Fail
  Net Margin > 15% 7.1% Fail
Balance Sheet Debt to Equity < 50% 91.0% Fail
  Current Ratio > 1.3 1.13 Fail
Opportunities Return on Equity > 15% 22.7% Pass
Valuation Normalized P/E < 20 14.65 Pass
Dividends Current Yield > 2% 1.1% Fail
  5-Year Dividend Growth > 10% 14.2% Pass
       
  Total Score   3 out of 10

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

Rock-Tenn packs up a score of just 3. But the packaging maker scored a sweet acquisition recently, and with consolidation making the industry more of an oligopoly, Rock-Tenn is in prime position to profit.

Rock-Tenn makes paper-based packaging for a variety of uses, including express mailing packages, agricultural packaging, and corrugated boxes. That kind of boring business doesn't usually grab investor attention, but private equity companies have paid attention, with industry player Pactiv having gone private in 2010.

But rather than hoping for someone to pay it a nice premium in a buyout, Rock-Tenn decided earlier this year to pull the trigger itself, grabbing up competitor Smurfit-Stone in a $3.5 billion takeover. Motley Fool Rising Star Michael Olsen argues that the pickup was hugely beneficial for Rock-Tenn, since it managed to snag Smurfit-Stone almost right out of bankruptcy at a bargain price.

When you compare Rock-Tenn to competitors Temple-Inland (NYSE: TIN), International Paper (NYSE: IP), and Packaging Corp. of America (NYSE: PKG), Rock-Tenn has an attractive combination of traits. Its high return on equity and strong margins stand up to Packaging Corp., but Rock-Tenn's earnings multiple is far lower. Moreover, the company has the fastest five-year revenue growth of the four, not even including the extra revenue that Smurfit-Stone will provide.

Rock-Tenn's biggest challenge will be digesting its recent acquisition. But if the company can find the $150 million in synergies it hopes to achieve from buying Smurfit-Stone, that should take it a long way toward reaching perfection in the long run.

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 Rock-Tenn 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. The Motley Fool owns shares of Rock-Tenn. 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.