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 Wal-Mart (NYSE: WMT) 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 Wal-Mart.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5.1% Fail
  1-Year Revenue Growth > 12% 6.9% Fail
Margins Gross Margin > 35% 24.9% Fail
  Net Margin > 15% 3.5% Fail
Balance Sheet Debt to Equity < 50% 73.7% Fail
  Current Ratio > 1.3 0.83 Fail
Opportunities Return on Equity > 15% 23.5% Pass
Valuation Normalized P/E < 20 14.63 Pass
Dividends Current Yield > 2% 2.4% Pass
  5-Year Dividend Growth > 10% 15.6% Pass
  Total Score   4 out of 10

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

Since we looked at Wal-Mart last year, the company has kept its four-point score. But a 20% gain for the shares shows how the discount retailer has finally broken out of a slump and started growing again.

Wal-Mart's success in low-cost retail has been legendary. Yet after benefiting greatly during the recession and financial crisis in 2008, Wal-Mart saw a big slowdown that led to nine straight quarters of falling U.S. same-store sales.

More recently, though, Wal-Mart has started turning things around. Same-store sales have now risen three quarters in a row, and with concerns about the future of the economy getting larger, Wal-Mart is again capturing the attention of shoppers looking to save. The company has also responded to competition from deep-discounting dollar stores by trying out smaller store formats, a move that could also help it fight against losing business to online retail giant Amazon.com (Nasdaq: AMZN).

One area where Wal-Mart has stayed ahead of its competition is in global expansion. While Target (NYSE: TGT) and Costco (Nasdaq: COST) are largely domestically focused, Wal-Mart has more than half of its stores located outside North America. That should help give Wal-Mart an edge in the long run as emerging markets expand, although it will have to deal with PriceSmart (Nasdaq: PSMT) and other international retailers already doing business in overseas markets.

The big controversy on everyone's minds with Wal-Mart is its recent Mexican bribery scandal. But already, investors seem to be moving past that to refocus on Wal-Mart's growth potential. If it can put the bribery episode behind it, Wal-Mart has the potential to produce impressive gains in the next economic cycle and beyond.

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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