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 Wal-Mart (NYSE: WMT) 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 Wal-Mart.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5.9% Fail
  1-Year Revenue Growth > 12% 3.0% Fail
Margins Gross Margin > 35% 25.2% Fail
  Net Margin > 15% 3.9% Fail
Balance Sheet Debt to Equity < 50% 81.4% Fail
  Current Ratio > 1.3 0.90 Fail
Opportunities Return on Equity > 15% 23.4% Pass
Valuation Normalized P/E < 20 13.12  Pass
Dividends Current Yield > 2% 2.7% Pass
  5-Year Dividend Growth > 10% 15.6% Pass
       
  Total Score   4 out of 10

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

With four points, Wal-Mart isn't ringing up perfection just yet. The discount retail giant has been a leader for decades, but the company has struggled recently.

During the recession, Wal-Mart's stock was a beacon of hope in a gloomy market. In 2008, when the S&P dropped 37%, Wal-Mart actually posted a big 20% gain -- even as similar retailers, like Target (NYSE: TGT), suffered significant share losses.

Yet now that the recession is supposedly over, Wal-Mart is facing almost unique difficulty in sustaining growth. Last month, the company announced its eighth straight quarter of falling same-store sales in its U.S. stores. International growth has been stronger, with an 11.5% gain in sales in the latest quarter. But at $28 billion per quarter, the international segment still represents only about a quarter of total revenue. Meanwhile, rival Costco (Nasdaq: COST), which would seem to have roughly the same target audience, has had very few problems, and BJ's Wholesale (NYSE: BJ) has also managed to beat a tough environment to post good results.

Part of the problem may be competition from below. Wal-Mart is no longer the cheapest game in town, with ultra-discounters Dollar General (NYSE: DG), Family Dollar (NYSE: FDO), and Big Lots (NYSE: BIG) offering even lower prices on some items.

Until Wal-Mart can regain its reputation as the undisputed low-price leader, its retreat from perfection will likely continue. Only by refocusing on its core mission will it restore its former greatness.

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 Wal-Mart 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 Costco and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Wal-Mart and Costco, as well as creating a diagonal call position on Wal-Mart. 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.