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 Community Health Systems (NYS: CYH) 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 Community Health Systems.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 26.7% Pass
  1-Year Revenue Growth > 12% 4.9% Fail
Margins Gross Margin > 35% 45.6% Pass
  Net Margin > 15% 1.5% Fail
Balance Sheet Debt to Equity < 50% 309.3% Fail
  Current Ratio > 1.3 1.49 Pass
Opportunities Return on Equity > 15% 12.2% Fail
Valuation Normalized P/E < 20 6.41 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   4 out of 10

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

With four points, Community Health Systems hasn't had everything go its way over the years. But recently, the hospital operator is seeing some improvement.

Community Health Systems operates over 130 hospitals across 29 states, as well as physician practices, surgical centers, and other auxiliary services. That may seem large, but HCA (NYS: HCA) actually weighs in with a slightly larger hospital network. Nevertheless, Community has done a good job of growing by acquisition, with revenue having jumped from just $4.2 billion in 2006 to more than $13.6 billion over the past 12 months.

But the company has faced many challenges. After a hostile takeover attempt of Tenet Healthcare (NYS: THC) , Tenet shot back with allegations of fraud last year. Moreover, between new health-care reform laws and other initiatives designed to cut Medicare costs, Universal Health Services (NYS: UHS) , Tenet, HCA, and Community all saw their shares take big haircuts last summer.

Yet through it all, Community has actually performed pretty well as far as its financials are concerned. Earlier this week, Community announced better-than-expected results for its fourth quarter. The company's cost-cutting strategies were successful in helping the company beat earnings-per-share estimates by $0.02 despite falling short on top-line growth.

For Community Health Systems to get closer to perfection, it needs to navigate the uncertain future of health-care reform to a successful resolution. When that happens, investors may finally recognize the potential value of the 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.

Community Health Systems 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 Community Health Systems 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. 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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