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 Getty Realty (NYS: GTY) 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 Getty Realty.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 9.6% Fail
  1-Year Revenue Growth > 12% 28.0% Pass
Margins Gross Margin > 35% 80.0% Pass
  Net Margin > 15% 11.0% Fail
Balance Sheet Debt to Equity < 50% 45.8% Pass
  Current Ratio > 1.3 3.46 Pass
Opportunities Return on Equity > 15% 3.4% Fail
Valuation Normalized P/E < 20 23.42 Fail
Dividends Current Yield > 2% 0%* Fail
  5-Year Dividend Growth > 10% NM* NM
       
  Total Score   4 out of 9

Source: S&P Capital IQ. NM = not meaningful. *Based on Getty Realty's decision to defer declaring its first-quarter dividend in 2012. Total score = number of passes.

With only four points, Getty Realty doesn't get close to perfection. The real estate investment trust doesn't exactly fit the mold of what most investors expect, and its shares haven't behaved well lately either.

When most investors think of REITs these days, they look for the huge dividend yields that mortgage players American Capital Agency (NAS: AGNC) and Annaly Capital (NYS: NLY) produce. Yet the only thing that those players have in common with Getty Realty is their business structure. As REITs, all three of these companies have to pay out the bulk of their income in dividends every year.

But while Annaly and its peers focus on mortgage investments, Getty owns gas-station properties. In Getty's case, its business model is to lease its locations back to the marketing arm of Getty Petroleum, which operates them as gas stations. Separating out downstream refining and marketing operations into separate businesses has become almost commonplace in the energy industry, as both Marathon Petroleum (NYS: MPC) and ConocoPhillips (NYS: COP) can attest to.

The problem is that when Getty Petroleum's marketing arm went bankrupt, it took away two-thirds of Getty Realty's revenue. That is why the company took the extraordinary step of discontinuing dividends for the time being as it tries to figure out its situation going forward.

For Getty Realty to get back on track, it needs to navigate its primary customer's bankruptcy filing and come up with a viable strategy. Whether it's negotiating with that customer or coming up with new ones, Getty Realty still has plenty of potential in the valuable real estate it owns.

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.

Getty Realty isn't the 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 Getty Realty 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 Annaly Capital. Motley Fool newsletter services have recommended buying shares of Annaly Capital. 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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