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 AstraZeneca (NYSE: AZN) 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 AstraZeneca.


What We Want to See


Pass or Fail?

Growth 5-year annual revenue growth > 15% 6.2% Fail
  1-year revenue growth > 12% (2.1%) Fail
Margins Gross margin > 35% 82.4% Pass
  Net margin > 15% 24.8% Pass
Balance sheet Debt to equity < 50% 42.6% Pass
  Current ratio > 1.3 1.47 Pass
Opportunities Return on equity > 15% 37.8% Pass
Valuation Normalized P/E < 20 8.62 Pass
Dividends Current yield > 2% 5% Pass
  5-year dividend growth > 10% 14.4% Pass
  Total Score   8 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

AstraZeneca's impressive score of eight is a cure for the shareholder blues. But don't let the score fool you: The drugmaker faces the same challenges in maintaining its pipeline that most of its peers are dealing with right now.

AstraZeneca is best known for two drugs: Crestor and Nexium, which together make up roughly a third of the company's total revenue. Crestor lowers cholesterol, while Nexium treats acid reflux.

But the company faces a dual problem. First, it has its own patent cliff to contend with, as four out of five of its best-selling drugs come off patent in the next four years. Even worse, generic versions of competing drugs can actually eat into AstraZeneca's profits as well. For instance, a generic version of Merck (NYSE: MRK) drug Zocor has hurt not just Merck but also Pfizer (NYSE: PFE) and AstraZeneca, as sales of both Crestor and Pfizer's Lipitor get hurt by patients opting for generics even when drugs aren't directly comparable.

The drugmaker got some good news a couple months ago, when the Food and Drug Administration approved its cancer drug vandetanib. The drug has a lock on the late-stage medullary thyroid cancer market, but it won't be a blockbuster for the company -- the disease strikes only a couple thousand patients.

AstraZeneca's backward-looking results are undoubtedly impressive. But like Eli Lilly (NYSE: LLY) and GlaxoSmithKline (NYSE: GSK), the company's low valuations reveal that investors are worried about what the future will bring. If AstraZeneca can pull another rabbit out of its hat in the form of a blockbuster new drug, then shares could quickly jump to levels that reflect its financial strength.

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.

Click here to add AstraZeneca to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of GlaxoSmithKline. Motley Fool newsletter services have recommended buying shares of GlaxoSmithKline and Pfizer. 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.