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 Johnson & Johnson (NYS: JNJ) 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 Johnson & Johnson.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 4.0% Fail
  1-Year Revenue Growth > 12% 5.6% Fail
Margins Gross Margin > 35% 68.7% Pass
  Net Margin > 15% 14.9% Fail
Balance Sheet Debt to Equity < 50% 29.8% Pass
  Current Ratio > 1.3 2.46 Pass
Opportunities Return on Equity > 15% 16.4% Pass
Valuation Normalized P/E < 20 22.21 Fail
Dividends Current Yield > 2% 3.5% Pass
  5-Year Dividend Growth > 10% 9.1% Fail
       
  Total Score   5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Johnson & Johnson last year, the health-care giant has lost three whole points. A pricier valuation, lower net margins, and a slower rate of increase for the dividend all conspired to cut J&J's score.

Last year, J&J was going through a very tough time. The company had seen two straight years of sales declines in the midst of seemingly countless product recalls, and some had wondered if the brightest days for the company were over.

But 2011 marked a nice turnaround for the company. Revenue rose 5.6%, thanks entirely to international growth, as the U.S. market remained stagnant. Much of the problem comes from those product recalls, which sent customers to products from Pfizer (NYS: PFE) and Merck (NYS: MRK) . Those companies have welcomed them with open arms, presenting J&J with a big challenge to try to get them back.

One way J&J has responded to competition is to look for strategic alliances. For instance, the company partnered with Gilead Sciences (NAS: GILD) on their third HIV drug partnership, giving Gilead the responsibility for developing and commercializing a four-drug combo pill that includes both Gilead and J&J drugs. The move should help the pair compete better against Pfizer and GlaxoSmithKline (NYS: GSK) , whose ViiV Healthcare joint venture also plays in the HIV space.

For J&J to get back its lost points, it needs to get past its product-recall problems and return to more solid growth. If it can do so, then J&J could get back to near-perfection in the years 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 the best investments from the rest.

Johnson & Johnson is an impressive stalwart stock, but it's not the only one. Learn about three more promising stocks for the long haul in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Johnson & Johnson to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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 Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of GlaxoSmithKline, Pfizer, Johnson & Johnson, and Gilead Sciences, as well as creating a diagonal call position in Johnson & Johnson. 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 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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