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 Mesabi Trust (NYSE: MSB) 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 Mesabi Trust.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 8.7% Fail
  1-Year Revenue Growth > 12% 83.8% Pass
Margins Gross Margin > 35% 100.0% Pass
  Net Margin > 15% 97.2% Pass
Balance Sheet Debt to Equity < 50% 0.0% Pass
  Current Ratio > 1.3 5.35 Pass
Opportunities Return on Equity > 15% 801.8% Pass
Valuation Normalized P/E < 20 20.83 Fail
Dividends Current Yield > 2% 7.9% Pass
  5-Year Dividend Growth > 10% 9.9% Fail
       
  Total Score   7 out of 10

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

Mesabi Trust earns a score of 7 and falls just short on a couple of metrics. The trust produces a hot commodity, but some misunderstandings about the lumpy nature of the company's dividend makes it more volatile than it might otherwise be.

Mesabi is a royalty trust with substantial iron ore holdings. Cliffs Natural Resources (NYSE: CLF) subsidiary Northshore Mining mines the ore, but shareholders get a royalty interest in the form of quarterly distributions.

For its most recent quarter, the company dropped its dividend to just $0.05, which would imply a yield of only 0.7%. Yet the problem was due to seasonality. The company's first-quarter dividend is always on the low side, and this year, bad weather kept shippers from moving as much ore as normal through the Great Lakes.

Unlike Great Northern Iron Ore (NYSE: GNI), a similar high-yielding iron ore royalty trust that is set to dissolve in 2015 and transfer its assets to ConocoPhillips (NYSE: COP), Mesabi doesn't have a fixed termination date and will not cease to exist within the next 21 years at least.

Certainly, commodity-related stocks like Mesabi have plenty of risk. But investors will now find Mesabi shares down more than a third since March. If you think that global expansion will keep demand for iron ore high, then Mesabi could be poised for a big bounce.

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 Mesabi Trust 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. 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.