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 Morningstar (Nasdaq: MORN) 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 Morningstar.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 18.9% Pass
  1-Year Revenue Growth > 12% 18% Pass
Margins Gross Margin > 35% 71.8% Pass
  Net Margin > 15% 15.3% Pass
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 2.23 Pass
Opportunities Return on Equity > 15% 11.6% Fail
Valuation Normalized P/E < 20 38.42 Fail
Dividends Current Yield > 2% 0.3% Fail
  5-Year Dividend Growth > 10% NM NM
  Total Score   6 out of 9

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Morningstar started paying a dividend in December 2010. Total score = number of passes.

With a score of six, Morningstar can report a pretty strong performance. The company dominates its niche and has shown that it isn't content to rest on its laurels, but rather continually tries to drive itself forward.

Nearly anyone who's ever invested in a mutual fund has heard about Morningstar. The company provides ratings and research for the thousands of offerings in the fund universe, as well as for other types of investments, including stocks, ETFs, and closed-end funds. By serving institutional investors, financial advisors, and individual investors, Morningstar taps every source of revenue it can find to make the most of its in-house research.

Companies charged with providing financial ratings and research have taken a lot of criticism lately. Many blame Moody's (NYSE: MCO), Fitch, and McGraw-Hill's (NYSE: MHP) S&P division for contributing to the cause of the financial crisis, as their ratings proved inaccurate in the extreme. Yet Morningstar has sidestepped that condemnation, and its reputation may help it launch new initiatives in the future.

One such move happened just last month, when Morningstar announced that it would change its fund rating system to move beyond past performance by adding a new grading system to assess future performance estimates. Combined with the existing star system, the new grades should help Morningstar give a more complete picture of a fund.

With far better growth and profit margins than Thomson Reuters (NYSE: TRI), Morningstar is in an enviable position in its industry. It isn't a perfect stock just yet, but the company is doing everything it can to reach for 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.

Click here to add Morningstar 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 Morningstar. Motley Fool newsletter services have recommended buying shares of Moody's and Morningstar. 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.