Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Otter Tail (Nasdaq: OTTR) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Otter Tail.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

2.7%

fail

 

1-Year Revenue Growth > 12%

(13.5%)

fail

Margins

Gross Margin > 35%

25.7%

fail

 

Net Margin > 15%

0.9%

fail

Balance Sheet

Debt to Equity < 50%

76.9%

fail

 

Current Ratio > 1.3

1.62

pass

Opportunities

Return on Equity > 15%

1.4%

fail

Valuation

Normalized P/E < 20

48.4

fail

Dividends

Current Yield > 2%

5.9%

pass

 

5-Year Dividend Growth > 10%

1.4%

fail

       
 

Total Score

 

2 out of 10

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

Forget about perfect; a score of 2 lands Otter Tail near the bottom of the heap. But that doesn't mean the stock is doomed. Although many think of it as an electric utility, Otter Tail is actually a well-diversified company with a host of different business segments ranging from wind energy to recreational boating supplies.

Unfortunately, Otter Tail's diversified businesses haven't helped it lately. In its most recent quarter, the company reported losses tied to its boating business and cut guidance, and earlier this year, the company filed to offer as much as $75 million in new stock, raising concerns about potential dilution.

Keep in mind, though, that few utilities score well by these measures. Duke Energy (NYSE: DUK) and Southern Co. (NYSE: SO) have similarly low growth rates and fairly high debt levels. Yet despite the fact that Otter Tail is no more a pure play on wind energy than megaconglomerate General Electric (NYSE: GE), a rebound in interest in renewables could push both the stock and its underlying fundamentals back upward.

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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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.