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 and then decide whether Lincare Holdings (Nasdaq: LNCR) 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 Lincare Holdings.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5.3% Fail
  1-Year Revenue Growth > 12% 5.8% Fail
Margins Gross Margin > 35% 51.3% Pass
  Net Margin > 15% 10.5% Fail
Balance Sheet Debt to Equity < 50% 52.5% Fail
  Current Ratio > 1.3 2.25 Pass
Opportunities Return on Equity > 15% 18.3% Pass
Valuation Normalized P/E < 20 13.57 Pass
Dividends Current Yield > 2% 3.0% Pass
  5-Year Dividend Growth > 10% NM NM
  Total Score   5 out of 9

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Lincare started paying a dividend in July 2010. Total score = number of passes.

With 5 points, Lincare Holdings falls in the middle of our scale. The health-care company pays a good dividend and has an attractive valuation, but recent troubles have given shareholders some concerns.

Lincare Holdings specializes in providing home health-care equipment, including oxygen systems, respiratory therapy, and hospital beds and wheelchairs, to patients who need it. Given the aging population in the U.S., home health care is a growing market, and you'd expect that companies poised to take advantage of it would do well.

Lincare's niche differs from those of most home health-care companies. Gentiva Health (Nasdaq: GTIV), Almost Family (Nasdaq: AFAM), and Amedisys (Nasdaq: AMED) all focus more on providing nursing and other health professionals for in-home care. Lincare's emphasis on equipment makes it a somewhat more capital-intensive business, but it's one that has a higher barrier to entry than the medical professional services business.

Still, that hasn't been a recipe for automatic success. Just yesterday, Lincare's stock plunged on an earnings report that disappointed investors. Although sales came in better than expected, earnings missed estimates. A combination of higher costs and changing conditions for Medicare payments contributed to the shortfall.

With demographics in its favor, Lincare's long-term prospects look good. But the company needs to get costs under control, and it remains vulnerable to unfavorable regulatory changes to Medicare and other public sources of funding. If it can overcome those challenges, then Lincare could well move closer to perfection in the near future.

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.

Add Lincare Holdings 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 Almost Family. We Fools don't 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.