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 Disney (NYSE: DIS) 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 Disney.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 3.9% Fail
  1-Year Revenue Growth > 12% 7.4% Fail
Margins Gross Margin > 35% 19.1% Fail
  Net Margin > 15% 11.8% Fail
Balance Sheet Debt to Equity < 50% 36.2% Pass
  Current Ratio > 1.3 1.14 Fail
Opportunities Return on Equity > 15% 13.3% Fail
Valuation Normalized P/E < 20 14.86 Pass
Dividends Current Yield > 2% 1.5% Fail
  5-Year Dividend Growth > 10% 14.1% Pass
  Total Score   3 out of 10

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

Since we looked at Disney last year, the Mickey Mouse company has gained a point. A huge dividend increase last year earned the company a bump up on its long-term payout growth.

Disney is well known for its strong customer service and attention to detail. The company has a reputation around the world, and it's seeking to cash in on that reputation by growing abroad. Recently, the company said it plans to launch between 25 and 40 Disney Stores in China by 2015, hoping to avoid the debacle that Mattel (Nasdaq: MAT) suffered when its Barbie flagship store failed to gain traction.

Disney's biggest asset, however, is its content. With content delivery companies Netflix (Nasdaq: NFLX) and Amazon.com (Nasdaq: AMZN) fighting it out to cash in on getting entertainment in front of viewers, Disney and its content-production peers have all the leverage -- and Disney's prepared to profit from it. With Netflix having opened its U.K. and Irish streaming service earlier this month, Disney gets to collect licensing fees without having to do any extra work.

Still, it's hard to defend content rights. Zynga (Nasdaq: ZNGA), for instance, recently released a new game that looks eerily similar to an earlier offering from Disney. Meanwhile, piracy remains a constant threat, regardless of the FBI's crackdown of a file-sharing website earlier this month.

For Disney to reach perfection, it needs to make the most of its timeless library of content. With the right strategies -- as well as taking maximum advantage of its Marvel line -- Disney can keep making strides in the years to come.

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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Mattel, Walt Disney, Amazon.com, and Netflix. 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.