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 Windstream (Nasdaq: WIN) 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 Windstream.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 6.6% Fail
  1-Year Revenue Growth > 12% 16.4% Pass
Margins Gross Margin > 35% 61.7% Pass
  Net Margin > 15% 6.4% Fail
Balance Sheet Debt to Equity < 50% 908% Fail
  Current Ratio > 1.3 0.94 Fail
Opportunities Return on Equity > 15% 36.2% Pass
Valuation Normalized P/E < 20 15.35 Pass
Dividends Current Yield > 2% 8.6% Pass
  5-Year Dividend Growth > 10% 37.4% Pass
  Total Score   6 out of 10

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

Since we looked at Windstream last year, the rural telecom has picked up a point, having boosted its long-term dividend growth substantially. But the company still faces a huge debt load and continuing competitive pressures.

Investors expect big dividends from telecom companies. Around the world, telecoms like Telefonica (NYSE: TEF) and New Zealand Telecom (NYSE: NZT) attract interest because of their sizable payouts. Here in the U.S., Windstream, along with fellow rural telecoms Frontier Communications (NYSE: FTR) and CenturyLink (NYSE: CTL), have come into the spotlight for the same reason: their yields beat out even the fairly high payouts from their larger, more urban-focused rivals.

With those high yields, however, has come concern about whether the dividends are sustainable. The key lies in how well Windstream can capitalize when rural customers decide to migrate from old-fashioned landlines to mobile services. If the company can hold onto those customers and provide them with higher-margin services, the trend may actually help Windstream going forward.

Meanwhile, Windstream continues to try to grow, although not without controversy. Back in August, the company announced that it was buying out PAETEC in a $2.3 billion deal. The merger drew a lawsuit from PAETEC shareholders, but it was settled fairly quickly, and the transaction went through on Dec. 1.

Looking forward, the big question for Windstream is whether it can get its debt levels down. The PAETEC transaction added to the debt burden, but it should also help the company with some cost savings. If Windstream can digest its acquisitions and keep a tight rein on its customers, then it could get even closer to perfection in the years ahead.

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 ."

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.