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 Cal-Maine (Nasdaq: CALM) 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 Cal-Maine.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

14.2%

Fail

 

1-Year Revenue Growth > 12%

9.0%

Fail

Margins

Gross Margin > 35%

18.8%

Fail

 

Net Margin > 15%

5.9%

Fail

Balance Sheet

Debt to Equity < 50%

20.3%

Pass

 

Current Ratio > 1.3

3.28

Pass

Opportunities

Return on Equity > 15%

14.2%

Fail

Valuation

Normalized P/E < 20

14.04

Pass

Dividends

Current Yield > 2%

0.6%

Fail

 

5-Year Dividend Growth > 10%

75.3%

Pass

       
 

Total Score

 

4 out of 10

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

With four points, Cal-Maine does better than laying a goose egg, but it's definitely not perfect. The egg producer faces many of the same problems that companies throughout the food and agricultural industries are dealing with.

A big challenge that agricultural companies have had to overcome is the rising price of food. That's a positive for companies that help farmers increase production, such as fertilizer makers Terra Nitrogen (NYSE: TNH) and PotashCorp (NYSE: POT). But it's bad news for food producers that need feed grain. In the chicken segment, Sanderson Farms (Nasdaq: SAFM), Tyson Foods (NYSE: TSN), and Pilgrim's Pride (NYSE: PPC) have fought among themselves to maintain high production levels despite sagging demand.

Similar dynamics have Cal-Maine feeling the heat of lower margins. Earlier this week, the company announced that profits fell 35% despite a big jump in sales. Without hedges of the sort that Smithfield Foods (NYSE: SFD) put in place, Cal-Maine had no choice but to cut its dividend. Even worse, CEO Dolph Baker expects no respite until at least the middle of next year.

Cal-Maine performed well during the last recession and could be a good play for investors expecting further turbulence in the market. But until feed prices moderate, it's not 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.

Click here to add Cal-Maine 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. The Motley Fool owns shares of Cal-Maine Foods. 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.