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 J.C. Penney (NYSE: JCP) 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 J.C. Penney.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (1.2%) Fail
  1-Year Revenue Growth > 12% 1% Fail
Margins Gross Margin > 35% 39% Pass
  Net Margin > 15% 2.2% Fail
Balance Sheet Debt to Equity < 50% 65.2% Fail
  Current Ratio > 1.3 2.11 Pass
Opportunities Return on Equity > 15% 7.9% Fail
Valuation Normalized P/E < 20 20.05 Fail
Dividends Current Yield > 2% 2.3% Pass
  5-Year Dividend Growth > 10% 7.6% Fail
       
  Total Score   3 out of 10

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

With only three points, J.C. Penney isn't ringing up a perfect score for investors. The retailer has gone through a long period of rebuilding, but some interesting developments may have this turnaround story revving into high gear soon.

The recession has been especially tough on retail stocks, and few have taken bigger hits than Penney. Both high-end stores like Tiffany (NYSE: TIF) and ultra-cheap players like Family Dollar (NYSE: FDO) have seen sales hold up relatively well, but middle-of-the-road retailers like Penney and Macy's (NYSE: M) have had the most trouble maintaining revenue levels over the past five years.

But not everyone thinks that Penney shares are a lost cause. Last summer, activist investor Bill Ackman started building what would eventually become a substantial position in Penney. Although some initially believed Ackman was simply trying to unlock the value of Penney's real estate holdings, it's becoming clear that he now aims to return the company's retail business to its full potential.

Just earlier this week, Penney made what could potentially be a game-changing announcement: that Apple (Nasdaq: AAPL) retail head Ron Johnson would come on board as president and eventually assume the role of CEO. With the huge success of the Apple Store chain, Johnson has plenty of experience, and investors hope that he can take Penney to the same pinnacle that Apple has enjoyed.

Shareholders are excited that management changes could help resurrect the stock from its doldrums. That's possible, but even if Johnson is successful, it'll be a long time before Penney starts looking like 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 J.C. Penney 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 Apple. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Apple. 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.