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 whether Oshkosh (NYSE: OSK) 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 Oshkosh.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 17.7% Pass
  1-Year Revenue Growth > 12% (17.8%) Fail
Margins Gross Margin > 35% 16.4% Fail
  Net Margin > 15% 4.7% Fail
Balance Sheet Debt to Equity < 50% 68.5% Fail
  Current Ratio > 1.3 1.46 Pass
Opportunities Return on Equity > 15% 25.2% Pass
Valuation Normalized P/E < 20 4.58 Pass
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
  Total Score   4 out of 10

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

With just four points, Oshkosh doesn't put up much of a fight. The defense contractor is suffering along with its entire industry in an environment of huge uncertainty.

Defense stocks across the board have taken damage from incessant budget wrangling on Capitol Hill. Yet some, including Fool analyst Andrew Tonner, think the declines have been overdone. Many contractors, including Lockheed Martin (NYSE: LMT) and Boeing (NYSE: BA), have actually seen order backlogs rise over the past year.

Still, Oshkosh deserves some of the hit that its stock has taken, because it created the root of its problems long before funding tightened up. Two years ago, right after it beat out Force Protection (Nasdaq: FRPT) and Navistar (NYSE: NAV) on a contract to provide off-road armored vehicles to the Pentagon, Oshkosh announced that it had also won the right to build the Army's Family of Medium Tactical Vehicles. Yet, as it's turned out, the company underbid on the FMTV project, and cost overruns are threatening to turn the project into a money-loser. That's put Oshkosh's overall profits under pressure.

To reverse its decline, Oshkosh needs to understand that even in a tough competitive environment, it doesn't pay to do whatever it takes to win business. Its shares are a huge bargain, but it'll still likely be a while before Oshkosh can turn things around and look more like 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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