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 Sturm, Ruger (NYSE: RGR) 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 Sturm Ruger.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 16.7% Pass
  1-Year Revenue Growth > 12% 39.4% Pass
Margins Gross Margin > 35% 35.6% Pass
  Net Margin > 15% 13.0% Fail
Balance Sheet Debt to Equity < 50% 0.0% Pass
  Current Ratio > 1.3 3.08 Pass
Opportunities Return on Equity > 15% 35.4% Pass
Valuation Normalized P/E < 20 17.27 Pass
Dividends Current Yield > 2% 3.0% Pass
  5-Year Dividend Growth > 10% 10.8%* Pass
       
  Total Score   9 out of 10

Source: S&P Capital IQ. Total score = number of passes. * 7-year growth rate.

Since we looked at Sturm, Ruger last year, the company has picked up four full points. A huge pickup in revenue, accompanied by margin improvement and a higher dividend yield, brought the company to near-perfection, and shareholders have to be happy with the 75% jump in the stock over the past year.

Gun makers have had an amazing run over the past four years. Shares have soared pretty much ever since the 2008 presidential election, when sales started to jump in anticipation that then-President-Elect Barack Obama would lead calls for more restrictive gun-control laws. Sturm, Ruger's stock price has risen sixfold over that span.

Fears of tighter gun control have largely proved unfounded. Still, the elections later in the year may be part of what has driven strength in gun sales this year, as rival Smith & Wesson (Nasdaq: SWHC) named the elections as a contributing factor when it released its quarterly report in June. Recently, Sturm, Ruger even had to stop taking orders because its backlogs were so huge.

Gun makers owe some of their success to the popularity of sporting goods retailers. With Cabela's (NYSE: CAB), Dick's Sporting Goods (NYSE: DKS), and Hibbett Sports (Nasdaq: HIBB) all reporting strong sales and posting impressive share-price growth, customers are getting exposure to guns, and that undoubtedly helps Sturm, Ruger and its peers.

For Sturm, Ruger to improve, it just needs to squeeze a little extra margin out of each sale. If it can do so while keeping growth on the high end, Sturm, Ruger could well become a perfect stock.

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 in this article. The Motley Fool owns shares of Dick's Sporting Goods. Motley Fool newsletter services have recommended buying shares of Cabela's. 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.