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 NutriSystem (Nasdaq: NTRI) 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 NutriSystem.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 8.5% Fail
  1-Year Revenue Growth > 12% (7.3%) Fail
Margins Gross Margin > 35% 55.2% Pass
  Net Margin > 15% 5.3% Fail
Balance Sheet Debt to Equity < 50% 43.1% Pass
  Current Ratio > 1.3 2.44 Pass
Opportunities Return on Equity > 15% 25.7% Pass
Valuation Normalized P/E < 20 15.84 Pass
Dividends Current Yield > 2% 4.6% Pass
  5-Year Dividend Growth > 10% 0%* Fail
       
  Total Score   6 out of 10

Source: Capital IQ, a division of Standard and Poor's. *Growth rate since NutriSystem started paying a dividend in May 2008. Total score = number of passes.

With six points, NutriSystem is helping investors with their risk reduction programs. The weight-loss company is at the heart of people's perennial efforts to improve themselves, but lately, business has slimmed down almost as much the waistlines of the company's customers.

NutriSystem is well known for its home delivery of prepackaged meals designed to help people lose weight. That food is a key distinction between NutriSystem and competitors Weight Watchers International (NYSE: WTW) and Medifast (NYSE: MED). But it can also prove a liability for the company: because NutriSystem clients are so dependent on prepared meals, many have trouble maintaining weight loss when they try to move back to cooking their own food.

Lately, NutriSystem has had trouble bulking up its finances. In its most recent quarter, the company reversed a year-ago profit with a loss of $3.4 million, and sales fell more than 16%. Short sellers are piling up against the stock, with more than a quarter of available shares sold short as of late June.

Another constant threat is competition from a new diet drug. Last year, the FDA rejected both Arena Pharmaceuticals' (Nasdaq: ARNA) lorcaserin and VIVUS' (Nasdaq: VVUS) Qnexa. And although Orexigen (Nasdaq: OREX) managed to get a recommendation from an FDA advisory panel, the full FDA still chose to require a more extensive trial before it would consider approving its Contrave drug. Still, it's probably only a matter of time before some obesity drug goes on the market, and when that happens, it could spell big trouble for NutriSystem.

Despite its strong score and impressive dividend yield , NutriSystem faces plenty of uncertainty in its future. Unless it can manage to demonstrate its dominance over its peers in some unexpected way, NutriSystem isn't likely to craft itself into a 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.

Click here to add NutriSystem 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. 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.