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 AllianceBernstein (AB -2.05%) 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 AllianceBernstein.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

NM

NM
 

1-Year Revenue Growth > 12%

NM

NM

Margins

Gross Margin > 35%

NM

NM
 

Net Margin > 15%

NM

NM

Balance Sheet

Debt to Equity < 50%

0%

Pass
 

Current Ratio > 1.3

NM

NM

Opportunities

Return on Equity > 15%

(10.4%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

5.1%

Pass
 

5-Year Dividend Growth > 10%

(27.5%)

Fail
       
 

Total Score

  

2 out of 4

Source: S&P Capital IQ. NM = not meaningful due to negative revenue and net income as well as insignificant current assets and liabilities. Total score = number of passes.

Since we looked at AllianceBernstein last year, the company has dropped three points. But the drop is largely due to AllianceBernstein's holding-company structure, in which S&P Capital IQ defines revenue as being the allocatable equity in net income or losses attributable to investors. The stock has actually done far better than these numbers might suggest, rising 20% over the past year.

As an investment manager, AllianceBernstein came into 2012 looking for better results. A flat stock market wasn't terribly good for investor confidence, and with the company benefiting from increased assets under management, apathy among customers isn't a money-making proposition.

Yet AllianceBernstein has also come under fire for being a more expensive investment option than some of its counterparts. In the college savings realm, for instance, Franklin Resources (BEN -1.85%), Hartford Financial (HIG -0.49%), and AllianceBernstein all offer actively managed 529 plan investment options that have higher expense ratios than similar index-based investment options from other plans. In addition, among 401(k) options, Morningstar found that AllianceBernstein scored near the bottom of the pack of 30 fund families, joining Hartford and BlackRock (BLK -0.05%) while lagging far behind no-load managers Dodge & Cox and T. Rowe Price (TROW -0.82%).

Still, a recent jump in the markets has led investors back into AllianceBernstein's bond and stock funds. About a week ago, the company announced much better revenues and big inflows into its funds, sending shares rising sharply.

For AllianceBernstein to improve, continuing inflows should help the company get back into the black. Once that happens, AllianceBernstein will almost automatically get a lot closer to perfection, and if strong markets persist, the gains could be substantial.

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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