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 Yongye International (Nasdaq: YONG) fits the bill.

The quest for perfectionStocks 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 Yongye International.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 175.8%* Pass
  1-Year Revenue Growth > 12% 118.3% Pass
Margins Gross Margin > 35% 55.7% Pass
  Net Margin > 15% 22.6% Pass
Balance Sheet Debt to Equity < 50% 0.4% Pass
  Current Ratio > 1.3 6.61 Pass
Opportunities Return on Equity > 15% 28.7% Pass
Valuation Normalized P/E < 20 7.10 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   8 out of 10

Source: Capital IQ, a division of Standard and Poor's. 
*4-year growth rate. Total score = number of passes.

Yongye hits a very promising score of 8. Once the Chinese maker of animal nutrition and fertilizer products starts paying a dividend, it could become a perfect stock.

Yongye finds itself in a very popular industry. Demand for fertilizer is high and seems poised to jump higher as growing populations need greater crop production, especially amid higher food prices. That demand has pushed PotashCorp (NYSE: POT) into the spotlight with BHP Billiton's acquisition attempt. But despite being much smaller and having greater growth potential, Yongye's shares trade at just a fraction of the multiples that PotashCorp and peers Mosaic (NYSE: MOS) and Agrium (NYSE: AGU) fetch.

Part of what's contributing to the stock's rock-bottom price at the moment is skepticism about Chinese small-cap stocks. Various allegations have hit China MediaExpress (Nasdaq: CCME) and China Agritech (Nasdaq: CAGC), forcing trading halts that have lasted more than a week. Recently, Yongye found itself a target of a bearish blogger, which caused a big drop in the company's shares.

Right now, the witch hunt for fraudulent Chinese companies has hijacked Yongye's stock price. But if the company is legitimate, then this might be the perfect buying opportunity for a near-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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