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 DryShips (Nasdaq: DRYS) 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 DryShips.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 33.1% Pass
  1-Year Revenue Growth > 12% 14.9% Pass
Margins Gross Margin > 35% 66.1% Pass
  Net Margin > 15% 3.6% Fail
Balance Sheet Debt to Equity < 50% 113.7% Fail
  Current Ratio > 1.3 1.06 Fail
Opportunities Return on Equity > 15% 1.5% Fail
Valuation Normalized P/E < 20 10.66 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   4 out of 10

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

Since we looked at DryShips last year, the dry bulk shipper has picked up a point, having boosted its revenue. But the company still faces tough times in an industry plagued by overcapacity.

The bulk shipping industry has struggled ever since the financial crisis. DryShips had to slash its dividend in light of having breached debt covenants back in early 2009, and the company hasn't made a payout to shareholders since.

Moreover, the long slump is taking its toll even on shippers that were smart enough to lock in long-term contracts. DryShips has about half of its capacity committed at favorable rates, but even Diana Shipping (NYSE: DSX) and Navios Maritime Holdings (NYSE: NM) -- both of which have substantial longer-term charters in place -- are seeing erosion in their average revenue as contracts end. Diana has had to replace some expiring contracts with new ones at rates that are as much as 80% lower.

The saving grace for DryShips may prove to be its foresight in diversifying into ultra-deepwater drilling. Although the company spun off its drilling operations into Ocean Rig UDW (Nasdaq: ORIG), DryShips retains a majority stake. When Ocean Rig won a contract for one of its submersibles, DryShips actually posted stronger gains than Ocean Rig shares did. Even though Ocean Rig faces tough competition from SeaDrill (NYSE: SDRL) and numerous other deepwater players, the sheer number of drilling opportunities promises to keep the entire deepwater industry busy for a long time -- leaving more than enough profit to go around for everyone.

For DryShips to get closer to perfection, it needs its core dry bulk business to recover. Eventually, prices will turn and the shares will hit bottom, but until that happens, DryShips will remain a risky stock to own.

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.

With DryShips potentially foundering, you'll want to look elsewhere for the best stock opportunities. Learn about three more promising stocks for the long haul in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add DryShips to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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.