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 Waste Management (NYSE: WM) 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 Waste Management.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (0.9%) Fail
  1-Year Revenue Growth > 12% 6.1% Fail
Margins Gross Margin > 35% 37.5% Pass
  Net Margin > 15% 7.6% Fail
Balance Sheet Debt to Equity < 50% 135.5% Fail
  Current Ratio > 1.3 1.00 Fail
Opportunities Return on Equity > 15% 15.2% Pass
Valuation Normalized P/E < 20 18.58 Pass
Dividends Current Yield > 2% 3.6 % Pass
  5-Year Dividend Growth > 10% 9.5% Fail
       
  Total Score   4 out of 10

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

With a score of four, Waste Management doesn't look like the perfect stock. But the company has found innovative ways to profit from what other people throw away, and it's hard to argue that trash isn't a growth industry.

Waste Management is the largest trash and environmental services company on the continent, with operations that include trash collection, landfill management, and recycling. The stock took a tumble during the financial crisis but came back swinging in the ensuing rally.

Despite its dominant position, Waste Management faces competition from a number of quarters. In its core business, rival Republic Services (NYSE: RSG) has seen much faster growth over the past five years, although Waste Management retains a big advantage in returns on equity over Republic. Niche medical player Stericycle (Nasdaq: SRCL) has much faster growth and wider margins, but also comes at a premium valuation compared to Waste Management shares, while radioactive disposal specialist US Ecology (Nasdaq: ECOL) pays a slightly higher dividend.

Even with competitive pressure, there's more than enough room in the industry for all of these players to grow. Fellow Fool Nick Kapur identified India as a potential growth opportunity for Waste Management, which has mostly stayed close to home. If the company diversifies to leverage its strength at home and build an international presence, Waste Management could easily look a lot closer to perfect in the 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.

Click here to add Waste Management 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. Waste Management is a Motley Fool Inside Value recommendation. Stericycle is a Motley Fool Rule Breakers selection. Republic Services and Waste Management are Motley Fool Income Investor recommendations. The Fool owns shares of Waste Management. 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.