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 Arkansas Best (NAS: ABFS) 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 Arkansas Best.

Growth 5-Year Annual Revenue Growth > 15% 0.3% Fail
  1-Year Revenue Growth > 12% 10.4% Fail
Margins Gross Margin > 35% 8.1% Fail
  Net Margin > 15% 0.0% Fail
Balance Sheet Debt to Equity < 50% 16.8% Pass
  Current Ratio > 1.3 1.61 Pass
Opportunities Return on Equity > 15% 0.2% Fail
Valuation Normalized P/E < 20 92.32 Fail
Dividends Current Yield > 2% 0.9% Fail
  5-Year Dividend Growth > 10% (27.5%) Fail
       
  Total Score   2 out of 10

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

Since we looked at Arkansas Best last year, the company has lost a point. Slow revenue growth is to blame for the score drop, but what has investors really worried is the 50% drop in its share price over the past year.

The entire transportation sector has gotten hurt badly from a tough environment recently, and trucking companies have had a worse time of it than their peers in other areas. High oil prices make trucking operations especially expensive, which pushed shares of Swift Transportation (NYS: SWFT) , Arkansas Best, and Con-way (NYS: CNW) sharply downward in 2011.

Arkansas Best managed to get one thing accomplished: It became profitable. But its fourth-quarter results still fell well short of expectations, as price increases led to a drop in tonnage and a miss on the revenue front as well. Still, even with its sky-high earnings multiple making it clear that its profits are minimal, Arkansas Best still took a step in the right direction.

Yet Arkansas Best has struggled even in relation to its peers. Back in April, analysts upgraded rival CH Robinson (NAS: CHRW) but downgraded Arkansas Best. Yet as Fool contributor Rich Smith described at the time, Arkansas Best trades below its book value, suggesting a margin of safety that should help its stock hold up.

As long as energy prices remain high, giving CSX (NYS: CSX) and competing railroads a big advantage on fuel costs, Arkansas Best will struggle to improve. Investors would be best off waiting for a better time for the company to take strides toward getting closer to perfection before buying shares.

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.

Arkansas Best 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 Arkansas Best 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 in this article. 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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