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 Oshkosh (NYS: OSK) 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 Oshkosh.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 8.8% Fail
  1-Year Revenue Growth > 12% 8.9% Fail
Margins Gross Margin > 35% 11.6% Fail
  Net Margin > 15% 2.3% Fail
Balance Sheet Debt to Equity < 50% 54.6% Fail
  Current Ratio > 1.3 1.55 Pass
Opportunities Return on Equity > 15% 11.3% Fail
Valuation Normalized P/E < 20 12.38 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   2 out of 10

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

Since we looked at Oshkosh last year, the company has seen its score cut in half. Yet the stock has risen more than 30% in hopes that it can overcome the big challenges that it has faced recently.

Oshkosh has a wide range of businesses under its corporate umbrella. Although its defense unit, which produces specialty military vehicles, earns more revenue than any other segment, its access equipment division enjoys better operating margins in providing aerial work platforms and towing and recovery equipment for industrial, construction, agricultural, and other commercial uses.

Despite its diversification, Oshkosh still has been hurt by recent defense cuts. Even as the much larger Lockheed Martin (NYS: LMT) has had to deal with delays on massive military contracts, smaller players like Oshkosh and AeroVironment (NAS: AVAV) are more exposed to specific budget cuts that can chop off large parts of the company's revenue.

But despite those challenges, Oshkosh has managed to stay healthy. Last month, the company crushed earnings estimates and raised its full-year outlook. Although its fire and emergency equipment business was pressured by weak financial conditions from municipal governments, Oshkosh showed how valuable a diverse set of businesses can be. And unlike trucking rival Navistar (NYS: NAV) , Oshkosh has managed to keep up with EPA regulations governing its vehicles, giving it a vital competitive advantage and helping it keep up with peer PACCAR (NAS: PCAR) .

For Oshkosh to improve, its best bet is to focus on getting its debt levels down slightly and its returns on equity up. If it can do so, it should be able to regain the ground it has lost in its quest for perfection.

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.

Oshkosh may not be perfect, but we've got some other ideas you might 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 Oshkosh to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

The article Has Oshkosh Become the Perfect Stock? originally appeared on Fool.com.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Lockheed Martin. Motley Fool newsletter services have recommended buying shares of PACCAR and AeroVironment. 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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