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 Sherwin-Williams (NYSE: SHW) 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 Sherwin-Williams.


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


3 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Sherwin-Williams last year, the company has seen its score drop by two points. The company's valuation has risen and dividend growth has slowed, although healthy revenue growth in the past year helped minimize the damage.

Sherwin-Williams continues to face a number of challenges. The housing market has stayed slow, and with a sluggish economy, homeowners don't have the disposable cash handy to do as much renovation work as they would during normal times.

In addition, the entire paint industry has seen costs rise, thanks to titanium dioxide price hikes from Dow Chemical (NYSE: DOW) and DuPont (NYSE: DD). Sherwin-Williams, PPG Industries (NYSE: PPG) and Valspar (NYSE: VAL) have all faced that pressure and are trying to pass on those higher costs to consumers. With margins already at relatively low levels, Sherwin-Williams doesn't have much capacity to eat those costs itself.

Yet despite last year's decision from Wal-Mart (NYSE: WMT) to stop offering Sherwin-Williams paint in its stores, the company has seen some solid growth in revenue, with same-store sales up 8.2% in the most recent quarter. Higher prices are partially responsible, but the company still managed to beat analyst estimates with modest earnings growth and provide decent guidance for the future.

For Sherwin-Williams to reverse course and improve, it really needs a turnaround in the economy. If it gets one, then expect a fresh coat of paint to boost the company's score and get Sherwin-Williams closer to perfection.

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 the best investments from the rest.

Click here to add Sherwin-Williams 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 Wal-Mart. Motley Fool newsletter services have recommended buying shares of Sherwin-Williams and Wal-Mart, as well as creating a diagonal call position in Wal-Mart. 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.