Has Best Buy Become the Perfect Stock?

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 Best Buy (BBY 1.09%) 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 the 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 Best Buy.

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

Since we looked at Best Buy last year, the company reversed its one-point gain from 2010 to 2011, plunging four points. Worsening debt levels along with falling returns on equity and earnings contributed to the drop, and the stock has suffered as a consequence, losing more than half its value over the past year.

At one point, Best Buy stood atop the world of consumer electronics retail, with its ability to provide one-stop shopping for everything from big-screen TVs to the latest movies and music. When it finally won its long battle with bankrupt Circuit City, Best Buy appeared to be in a prime position to dominate smaller players hhgregg (HGGGQ) and Radio Shack (RSHCQ) with its size and popularity.

But the online revolution has changed retail forever, and it has largely left Best Buy behind. Online giant Amazon.com (AMZN -1.65%) is the obvious culprit, undercutting Best Buy on price as well as offering sales tax advantages and in many cases free shipping as well.

Moreover, Best Buy has faced big challenges internally. Former CEO Brian Dunn stepped down earlier this year, and former chairman Richard Schulze has been unsuccessful in driving buying interest despite having said that he wanted to buy out the company for $24 to $26 per share -- double what it trades for now. New CEO Hubert Joly recently gave investors a five-point turnaround plan, but as Fool contributor Rick Munarriz noted earlier this month, the plan will be difficult to implement and includes several points that the company has already failed at.

For Best Buy to improve, it needs to achieve the impossible: pull back customers that have grown dependent on Amazon for deals. Although its initiative to focus on appliances may allow it to grab some business from Sears Holdings (SHLDQ), Best Buy seems likely to fade in significance in the years to come.

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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