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 Checkpoint Systems (NYS: CKP) 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 a 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 Checkpoint Systems.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

0.3%

Fail

 

1-Year Revenue Growth > 12%

(4.7%)

Fail

Margins

Gross Margin > 35%

37.2%

Pass

 

Net Margin > 15%

(16.2%)

Fail

Balance Sheet

Debt to Equity < 50%

27.4%

Pass

 

Current Ratio > 1.3

1.96

Pass

Opportunities

Return on Equity > 15%

(24.8%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

3 out of 9

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

Since we looked at Checkpoint Systems last year, the company hasn't improved on its three-point score. The stock has performed very badly, losing about a third of its value over the past year.

Checkpoint makes devices that help retailers prevent theft, most notably, RFID tags that trigger security alarms when shoppers leave the store with them still attached. But earlier this year, Checkpoint gave details on a turnaround initiative that would involve focusing not on product protection but, rather, on inventory management, moving away from its apparel-labeling business. That, it hopes, will let it go beyond competitors Avery Dennison (NYS: AVY) , which is a leader in RFID tag sales, and ADT (NYS: ADT) , which Tyco International (NYS: TYC) recently spun off, and which includes an RFID business, as well as its better-known home security solutions.

The move reflects the struggles that the company has endured lately. Yet with Checkpoint trying to restructure its operations, it has had to take various impairment charges that have pulled the company's bottom line into the red. Even taking those charges out, the company has seen a big reduction in operating income.

In its most recent quarter, the bad news continued for Checkpoint. The company reported another loss, with revenue plunging more than 12%. Even with a cost-cutting plan beginning to take effect, the company had to pull back revenue guidance for the full year, although earnings guidance will be in the upper end of the range it had previously given.

For Checkpoint to recover, it needs to figure out a strategic direction that will actually work in the current environment. Shareholders won't be convinced until the company reverses its sales slump, and only then will the stock be likely to start making progress toward getting closer to 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.

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Click here to add Checkpoint Systems to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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