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 Aetna (NYSE: AET) 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 Aetna.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 7.9% Fail
  1-Year Revenue Growth > 12% (2.2%) Fail
Margins Gross Margin > 35% 28.4% Fail
  Net Margin > 15% 5.3% Fail
Balance Sheet Debt to Equity < 50% 40.1% Pass
  Current Ratio > 1.3 0.75 Fail
Opportunities Return on Equity > 15% 17.8% Pass
Valuation Normalized P/E < 20 10.42 Pass
Dividends Current Yield > 2% 1.4% Fail
  5-Year Dividend Growth > 10% 56.9% Pass
       
  Total Score   4 out of 10

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

With just four points, Aetna doesn't insure financial success for shareholders. But the health insurer has an attractive valuation despite having seen significant share appreciation in the past year.

Health-insurance stocks generally have performed very well recently. The combination of investors wanting to turn more defensive with their stock portfolios after a long rally along with increasing comfort about health-care reform vaulted Humana (NYSE: HUM), UnitedHealth (NYSE: UNH), and Aetna to 40%-plus gains in the first half of the year.

But that doesn't mean they don't face challenges. Everyone still wants lower health-care costs, and that will pressure Aetna's margins indefinitely.  The interesting question is whether that pressure will lead to consolidation within the industry. Following the recent merger announcement from Express Scripts (Nasdaq: ESRX) and Medco Health Solutions (NYSE: MHS), potentially combining the two huge pharmacy-benefits rivals, insurers may also look for opportunities to achieve synergies from strategic combinations. 

In particular, Aetna and WellPoint (NYSE: WLP) have seen the weakest sales growth among major insurers in the past year. That may explain why they trade at lower multiples than Humana, UnitedHealth, and CIGNA (NYSE: CI).

Aetna isn't a perfect stock, and it isn't likely to become one until there's more clarity on health-care reform. To be successful over the long run, Aetna will need to lead its industry forward to handle the ever-changing health-care needs of its policyholders.

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 Aetna 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 UnitedHealth Group and MedcoHealth Solutions. Motley Fool newsletter services have recommended buying shares of WellPoint, UnitedHealth Group, and MedcoHealth Solutions, as well as creating a diagonal call position in UnitedHealth Group. 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.