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 Dean Foods (NYS: DF) 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 Dean Foods.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5.3% Fail
  1-Year Revenue Growth > 12% 7.7% Fail
Margins Gross Margin > 35% 23.1% Fail
  Net Margin > 15% (12.1%) Fail
Balance Sheet Debt to Equity < 50% NM NM
  Current Ratio > 1.3 1.33 Pass
Opportunities Return on Equity > 15% (225.5%) Fail
Valuation Normalized P/E < 20 17.57 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   2 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative shareholder equity. Total score = number of passes.

With two points, Dean Foods doesn't deliver a very appetizing score. But the dairy producer's numbers are skewed badly due to goodwill impairment charges taken against its Fresh Dairy Direct business.

A couple years ago, Dean Foods was one of the worst performers in the stock market. Rising milk costs and falling demand from consumers for Dean's premium-brand products made things look dire for the company. Grocers Kroger (NYS: KR) and Safeway (NYS: SWY) have been holding their store-brand milk prices low, forcing Dean to follow suit.

This margin-tightening situation was one felt around the industry, with Kraft Foods (NYS: KFT) and ConAgra (NYS: CAG) similarly facing higher input costs. The difference, though, is that both Kraft and ConAgra have been able to pass those higher costs through to consumers. More recently, Dean Foods has finally started doing the same thing, raising product prices to help boost revenue. But it hasn't been able to pass through all of those price gains, so margins are still slipping.

Just yesterday, Dean shares soared on an earnings beat. CEO Gregg Engles sounded a note of cautious optimism in announcing the results.

Dean Foods still has a long way to go to recover fully. With a heavy debt load, it needs to keep newly implemented cost controls in place. If it can keep up the pace, however, Dean Foods could get a lot closer to 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 out the best investments from the rest.

Dean Foods may not be a perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays 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 Dean Foods 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 Dean Foods. 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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