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 AMR (NYS: AMR) 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 AMR.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 1.1% Fail
  1-Year Revenue Growth > 12% 9.1% Fail
Margins Gross Margin > 35% 20.4% Fail
  Net Margin > 15% (4.2%) Fail
Balance Sheet Debt to Equity < 50% NM NM
  Current Ratio > 1.3 0.77 Fail
Opportunities Return on Equity > 15% NM NM
Valuation Normalized P/E < 20 NM NM
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
     
 
  Total Score   0 out of 7

Source: S&P Capital IQ. NM = not meaningful; AMR had negative shareholder equity and negative earnings over the period. Total score = number of passes.

AMR becomes the first stock we've looked at to score a goose egg. The company behind American Airlines has seen huge amounts of bad news recently, and there's some fear that it could be running out of options.

AMR hasn't been alone in dealing with a challenging environment for airlines. High fuel prices and a struggling economy don't make for healthy airlines, and rivals United Continental (NYS: UAL) , US Airways (NYS: LCC) , and Southwest Airlines (NYS: LUV) have all suffered substantial losses in their stocks. Yet thanks to fare increases and (for some) added fees that have been big moneymakers, those rivals at least have been profitable over the past year -- unlike AMR.

AMR simply has more problems than its peers. The company has been in a long battle with its unions and has thus far been unable to negotiate a deal, saddling it with high costs that greatly exceed what Alaska Airlines (NYS: ALK) , US Airways, and Southwest pay. And while smaller and niche carriers like Allegiant Travel (NAS: ALGT) and JetBlue (NAS: JBLU) still have growth potential, it's hard to see how AMR rebounds from here.

The company isn't giving up, though. In fact, it made a huge 460-plane order from Airbus and Boeing just earlier this year. Whether it'll be able to afford them in the long run, however, is a much different question.

With its very survival in question, trying to achieve perfection is too much for AMR to hope for right now. Unless company management can pull off a big turnaround, AMR and its shareholders face a long, hard road ahead.

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 AMR 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 ."

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Allegiant Travel. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. 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.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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