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 Beazer Homes (NYSE: BZH) 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 Beazer Homes.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (32.6%) Fail
  1-Year Revenue Growth > 12% (25.1%) Fail
Margins Gross Margin > 35% 10.9% Fail
  Net Margin > 15% (27.6%) Fail
Balance Sheet Debt to Equity < 50% 750.5% Fail
  Current Ratio > 1.3 8.86 Pass
Opportunities Return on Equity > 15% (67.2%) Fail
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   1 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

With only a single point, Beazer Homes hasn't built a strong foundation for shareholders. The housing market simply refuses to turn around, putting the entire industry in a holding pattern.

Everyone's painfully aware of just how badly the housing industry got hurt in the past five years. It's no surprise that homebuilder stocks have gotten smacked down equally badly, but given just how bad the punishment has been, it's tempting to see the sector as a potential value-investing goldmine -- if only the cycle will turn.

The problem, though, is that with the huge drops in sales, the housing market may never fully come back. Toll Brothers (NYSE: TOL), PulteGroup (NYSE: PHM), and Hovnanian (NYSE: HOV) have all seen their revenues contract at a 20% annual clip or more over the past five years. That means that sales will have to triple or more just to get back to breakeven -- something that's hard to see happening for the foreseeable future.

But recent signs of life in the housing market may finally lead to a turnaround -- eventually. Beazer, KB Home (NYSE: KBH), and Standard Pacific (NYSE: SPF) all saw strong order flow in the third quarter -- order flow that may eventually result in sales, although cancellation rates remain high as well.

With both new and existing home sales having jumped recently, overall activity in the housing market is increasing. But prices have continued to fall, and until they hit bottom, it's hard to see a lasting recovery for the sector. For Beazer to get anywhere near perfection, it needs not only for housing to turn but to grab a competitive advantage against its fellow homebuilders. That's a tall order, and one that's unlikely to occur in the near 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.

Click here to add Beazer Homes 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. 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.