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 Lowe's (NYSE: LOW) 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 Lowe's.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 1.4% Fail
  1-Year Revenue Growth > 12% 1.7% Fail
Margins Gross Margin > 35% 35.2% Pass
  Net Margin > 15% 4.1% Fail
Balance Sheet Debt to Equity < 50% 37.7% Pass
  Current Ratio > 1.3 1.21 Fail
Opportunities Return on Equity > 15% 10.9% Fail
Valuation Normalized P/E < 20 16.74 Pass
Dividends Current Yield > 2% 1.8% Fail
  5-Year Dividend Growth > 10% 29.7% Pass
       
  Total Score   4 out of 10

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

Lowe's hasn't built perfection in its stock, which scores just four points. Growth has slowed considerably since the heyday of the housing boom, but future trends could help boost the home improvement retailer back toward its former glory.

The collapse in the housing market hurt many industries, from homebuilders to mortgage lenders. But as you'd expect, home improvement retailers haven't been immune from the pain. Home Depot (NYSE: HD) has seen sales contract over the past five years, while Lowe's has had anemic growth at best.

But as home prices stay low, many current homeowners are deciding that if they have to stay in their current homes, they might as well do renovations. With an index of remodeling activity up every month for more than a year, Lowe's, along with niche players Lumber Liquidators (NYSE: LL) and Masco (NYSE: MAS), stand to benefit.

The question is whether favorable trends can continue long enough to outlast the housing bust. If not, then improvement at Lo we's may prove to be only a brief respite. But if housing eventually hits bottom, the resulting flood of activity could well spell even greater demand for Lowe's products, lifting it back closer to perfection.

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 Lowe's 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. Motley Fool newsletter services have recommended Lowe's, Lumber Liquidators, and Home Depot, as well as recommending writing covered calls in Lowe's. The Motley Fool owns shares of Lumber Liquidators. 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.