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 Hologic (Nasdaq: HOLX) 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 Hologic.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 31.1% Pass
  1-Year Revenue Growth > 12% 6.5% Fail
Margins Gross Margin > 35% 51.6% Pass
  Net Margin > 15% 8.8% Fail
Balance Sheet Debt to Equity < 50% 50.7% Fail
  Current Ratio > 1.3 2.64 Pass
Opportunities Return on Equity > 15% 5.6% Fail
Valuation Normalized P/E < 20 41.66 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   3 out of 10

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

With only three points, Hologic doesn't paint a perfect picture for investors. The medical imaging company has seen growth slow substantially during the recession, although its future prospects may be getting just a little brighter.

Hologic has a fairly wide range of health-care operations. With everything from mammography systems and cervical cancer test diagnostics to bone density measuring devices, Hologic focuses on women's health care. It also developed a drug to reduce risks of singleton spontaneous preterm birth for KV Pharmaceutical (NYSE: KV-A), which took over all rights to the drug after it gained FDA approval.

Of course, the company has plenty of competition. In mammography, giants like General Electric (NYSE: GE) and Fuji make competitive products. CR Bard (NYSE: BCR), Becton Dickinson (NYSE: BDX), and Abbott Labs (NYSE: ABT) offer rival products in other lines of business.

Earlier this week, Hologic saw a nice gain after it announced earnings that beat expectations. Moreover, although the company issued full-year fiscal 2012 guidance below what analysts were hoping for, growth across the full spectrum of its operating units is definitely a good sign.

For Hologic to reach perfection, it ideally needs to see a healthier economy lead to more health-care spending. With forward earnings looking much more reasonable and the potential for improving returns on equity, Hologic could see major score improvement in the future.

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.