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 athenahealth (Nasdaq: ATHN) 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 athenahealth.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 33.7% Pass
  1-Year Revenue Growth > 12% 30.5% Pass
Margins Gross Margin > 35% 62.5% Pass
  Net Margin > 15% 7.0% Fail
Balance Sheet Debt to Equity < 50% 0.0% Pass
  Current Ratio > 1.3 4.30 Pass
Opportunities Return on Equity > 15% 11.6% Fail
Valuation Normalized P/E < 20 92.83 Fail
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
  Total Score   5 out of 10

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

With five points, athenahealth has kept investors relatively healthy. Although the company has given shareholders reason to celebrate lately, the shares may be getting ahead of themselves.

As a software company, athenahealth specializes in systems that help medical clinics keep medical records and bill for their services. With doctors struggling to adapt to the ever-changing health-care landscape, automating processes and digitizing the huge volumes of paper most medical practices have will be a key component of keeping costs down. As you'd expect, that has attracted the attention of some big competitors, including General Electric's (NYSE: GE) health-care division as well as Siemens (NYSE: SI) Medical Solutions unit.

But athenahealth is following a strategy that's different from its competitors. While Allscripts Healthcare (Nasdaq: MDRX) and McKesson (NYSE: MCK) go after high-value contracts, athenahealth is trying to build market share -- even at the expense of net margin.

That strategy has been very effective for athenahealth. In its most recent quarter, the company not only posted good past results but also issued full-year guidance that was better than analysts had expected.

The big question is whether athenahealth can continue its fast pace of growth. With extremely high valuations, shareholders clearly think so. That doesn't give the company much margin for error, though, and so until athenahealth can deliver on its promise, it isn't going to become a perfect 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."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of McKesson. 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.