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 Bio-Reference Labs (Nasdaq: BRLI) 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 Bio-Reference Labs.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 22.1% Pass
  1-Year Revenue Growth > 12% 19.3% Pass
Margins Gross Margin > 35% 50.7% Pass
  Net Margin > 15% 6.8% Fail
Balance Sheet Debt to Equity < 50% 11.2% Pass
  Current Ratio > 1.3 3.72 Pass
Opportunities Return on Equity > 15% 22.1% Pass
Valuation Normalized P/E < 20 16.88 Pass
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
  Total Score   7 out of 10

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

With seven points, Bio-Reference Labs performs very well on our scale. The stock has also done pretty well, rising 25% in the past year despite a recent pullback.

Bio-Reference Labs operates in the rapidly growing area of clinical diagnostic testing. With many health providers having outsourced lab work outside their offices, industry giants Quest Diagnostics (NYSE: DGX) and LabCorp (NYSE: LH) have taken full advantage of the opportunity. Despite their efforts, though, they haven't locked out smaller players like Bio-Reference.

Bio-Reference has had a tumultuous year. Last November, the company found itself targeted by the short-selling investigator Street Sweeper, sending its shares tumbling nearly 40% in just two weeks. But the company announced a share buyback, and strong earnings in subsequent quarters dispelled most investors' concerns.

Last week, Bio-Reference suffered a setback. The company's fiscal third-quarter report saw sales rise 16% and earnings jump 25% from a year ago. But revenue came in short of expectations, and future guidance wasn't enough to make investors happy, sending the stock down as much as 10% the day of the release. With an increasing percentage of revenue coming from commercial health insurance carriers rather than billing of medical professionals or patients, Bio-Reference needs to pay close attention to the moves that insurance giants UnitedHealth (NYSE: UNH), WellPoint (NYSE: WLP), and others are making in response to health-care reform.

For Bio-Reference Labs to improve, it needs to work on boosting its net margins and considering a dividend. For now, though, growth is the order of the day, and so shareholders shouldn't expect a march to perfection anytime soon.

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.

Bio-Reference Labs may not be perfect, but we've got some other ideas you might like better. Let me invite you to learn about three smart long-term stock plays 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 Bio-Reference Labs 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. The Motley Fool owns shares of WellPoint and Bio-Reference Labs. Motley Fool newsletter services have recommended buying shares of Quest Diagnostics, WellPoint, LabCorp, and UnitedHealth, as well as creating a diagonal call position in UnitedHealth. 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.