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 Garmin (Nasdaq: GRMN) 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 Garmin.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 12.6% Fail
  1-Year Revenue Growth > 12% (7.7%) Fail
Margins Gross Margin > 35% 49.4% Pass
  Net Margin > 15% 18.2% Pass
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 2.79 Pass
Opportunities Return on Equity > 15% 16.5% Pass
Valuation Normalized P/E < 20 21.81 Fail
Dividends Current Yield > 2% 4.8% Pass
  5-Year Dividend Growth > 10% 32% Pass
  Total Score   7 out of 10

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

Since we looked at Garmin last year, the company has lost its way, falling two points. Another big drop in revenue over the past year pulled down its long-term track record, yet a big rise in its stock price has Garmin trading at a valuation above where we'd like to see it.

Garmin gets the lion's share of its revenue from the automotive navigation market. But the company has suffered from the increasing availability of navigational apps available from Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) via their smartphone platforms. Last year, Garmin bought rival German navigation company Navigon, which had downloadable apps for iPhone and Android, but analysts don't expect that to stem Garmin's overall revenue decline anytime soon.

The bigger challenge, though, is that cars will soon have full-fledged premium Internet connections of their own. That poses an even bigger threat to premium hardware sellers Garmin and Sirius XM (Nasdaq: SIRI), as the availability of Internet-based alternatives will make it far easier for competitors to eat into future sales. Already, Ford's (NYSE: F) MyFord Touch is starting to improve from initial negative reviews.

But interestingly, Garmin is looking to the fitness industry as a growth niche. The company's Forerunner watch series, which embeds a GPS to help track activity, has enjoyed a big sales increase recently.

Garmin still ranks close to perfection on our 10-point scale, but it's moving in the wrong direction. Unless it can reestablish itself as a dominant force in the industry, Garmin risks seeing its moat dry up and losing its competitive edge to the new generation of technological advances.

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. The Motley Fool owns shares of Ford, Google, and Apple. Motley Fool newsletter services have recommended buying shares of Google, Apple, and Ford, as well as creating a bull call spread position in Apple and a synthetic long position in Ford. 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.