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 Rosetta Resources (Nasdaq: ROSE) 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 Rosetta Resources.


What We Want to See


Pass or Fail?

Growth 5-year annual revenue growth > 15% 7.7% Fail
  1-year revenue growth > 12% 17.8% Pass
Margins Gross margin > 35% 80.6% Pass
  Net margin > 15% 6.8% Fail
Balance sheet Debt to equity < 50% 67.9% Fail
  Current ratio > 1.3 1.09 Fail
Opportunities Return on equity > 15% 4.4% Fail
Valuation Normalized P/E < 20 67.13 Fail
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
  Total Score   2 out of 10

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

Rosetta Resources can only dig up a score of two. But despite seeing some hard times, the oil and gas company has plenty of potential.

Rosetta is a small player in the energy business, but it's gotten a considerable amount of attention lately. That's because the company has been involved in the red-hot Eagle Ford shale play in South Texas nearly since it hit the radar screen of energy investors. The Eagle Ford has attracted everyone from giants BP (NYSE: BP) and Chesapeake Energy (NYSE: CHK) to smaller companies like Rosetta and Petrohawk Energy (NYSE: HK) ever since companies started finding high-producing gas wells there more than a year ago.

The problem for Rosetta, though, was that natural gas prices have remained at low levels. But thanks to horizontal drilling and hydraulic fracturing, the Eagle Ford is starting to produce oil and condensate "wet gas" as well as natural gas, and that has meant more profits for Rosetta.

Just last month, the company boosted its production guidance for the year. Although Rosetta missed its profit estimates, it believes it should be able to grow at double-digit percentage rates well into the future .

Unfortunately, the stock is priced for perfection. Even if it gets there, shareholders may not benefit too much. But one thing's for sure: Rosetta will be an interesting company 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 Rosetta Resources 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. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. 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.