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 Terra Nitrogen (NYSE: TNH) 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 Terra Nitrogen.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 8.7% Fail
  1-Year Revenue Growth > 12% 38.8% Pass
Margins Gross Margin > 35% 54.4% Pass
  Net Margin > 15% 52.1% Pass
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 6.27 Pass
Opportunities Return on Equity > 15% 146.6% Pass
Valuation Normalized P/E < 20 11.89 Pass
Dividends Current Yield > 2% 10.8% Pass
  5-Year Dividend Growth > 10% 33.6% Pass
  Total Score   9 out of 10

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

When we looked at Terra Nitrogen last year, it only managed to score six points, so the company has gotten a lot closer to perfect since then. Improvements in gross margins and a big turnaround in sales has helped pull up Terra Nitrogen's score, yet despite improving fundamentals, the company's valuation seems more attractive on an earnings basis.

Terra Nitrogen is a master limited partnership in the fertilizer business. Fellow industry peer CF Industries (NYSE: CF) owns around 75% of Terra Nitrogen's shares, but the MLP structure allows Terra Nitrogen to issue a dividend that dwarfs that of its parent along with competitors like CVR Partners (NYSE: UAN).

With the rise in commodities and especially food prices in recent years, the fertilizer business has taken on new importance as the agricultural industry around the world scurries to boost production to take advantage of the boom. But unlike better-known fertilizer stocks PotashCorp (NYSE: POT), Mosaic (NYSE: MOS), and Agrium (NYSE: AGU), Terra Nitrogen focuses almost exclusively on nitrogen, which the company can extract from the air and therefore is less expensive and gets less scrutiny from regulators.

The company's unusual structure can lead to some stock volatility, though. Last week, the stock dropped when a report came out noting that CF has the right to buy out minority shareholders of Terra Nitrogen at any time under conditions that are arguably more favorable to CF than to other shareholders.

More worrisome is the recent drop in commodities that has accompanied fears of another global recession. Although Terra Nitrogen is just a hair's breadth away from perfection now, macroeconomic headwinds could push it back down. Still, with a double-digit percentage dividend yield, Terra Nitrogen is doing everything right for shareholders right now.

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. 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.