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 Tenet Healthcare (NYSE: THC) 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 Tenet Healthcare.


What We Want to See


Pass or Fail?


5-year annual revenue growth > 15%




1-year revenue growth > 12%




Gross margin > 35%




Net margin > 15%



Balance sheet

Debt to equity < 50%




Current ratio > 1.3




Return on equity > 15%




Normalized P/E < 20




Current yield > 2%




5-year dividend growth > 10%




Total Score


4 out of 10

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

With only four points, Tenet Healthcare isn't keeping its shareholders very healthy. The hospital operator has faced a tough couple of years for the health care industry in general, and the problems are now starting to appear in the company's own financials.

The tough economy has had a big impact on Tenet's financial results lately. Just yesterday, the company reduced its 2011 guidance as its admission mix has skewed more toward Medicaid patients with lower reimbursement rates and away from Medicare patients that enjoy somewhat higher reimbursements.

But the problem is a universal one for health-care providers across the industry. In July, HCA Holdings (NYSE: HCA) saw a 36% drop in year-over-year earnings that sent shares plummeting, and Universal Health Services (NYSE: UHS), Health Management Associates (NYSE: HMA), and Tenet all fell in sympathy before seeing their own drops the following month as the debt ceiling deal signaled more pain down the road.

Those threats have led to some calls for consolidation in the industry. Tenet has gotten caught up in a contentious battle with Community Health Systems (NYSE: CYH), which offered to buy out Tenet earlier this year. Yet Tenet responded with allegations of fraud against Community Health -- a rather ingenious takeover defense.

With a lot of debt and stagnant growth, Tenet is a long way from being a perfect stock. Only once some clarity appears on the government health-care front does Tenet stand a chance of improving its position.

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 Tenet Healthcare 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. 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.