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 and then decide whether Suburban Propane 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.
  • Moneymaking 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 Suburban Propane.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

(5.9%)

Fail

 

1-year revenue growth > 12%

(10.7%)

Fail

Margins

Gross margin > 35%

15.6%

Fail

 

Net margin > 15%

0.2%

Fail

Balance sheet

Debt to equity < 50%

130.8%

Fail

 

Current ratio > 1.3

1.33

Pass

Opportunities

Return on equity > 15%

0.3%

Fail

Valuation

Normalized P/E < 20

89.07

Fail

Dividends

Current yield > 2%

9%

Pass

 

5-year dividend growth > 10%

3.7%

Fail

       
 

Total score

 

2 out of 10

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

Since we looked at Suburban Propane last year, the company lost a point, with returns on equity falling below levels in 2010 and 2011. The stock has also suffered, dropping about 20% over the past year.

Suburban Propane delivers several different types of energy products to residential and commercial customers, including not only propane but also fuel oil and other refined fuels. For those who don't have access to gas utility networks or who need fuel for customized purposes, Suburban is an essential part of meeting customers' needs.

The propane industry is a competitive one. Ferrellgas Partners , AmeriGas , and Star Gas Partners are just some of the other companies with propane businesses, although their focuses are slightly different. For instance, Ferrellgas manages the popular Blue Rhino line of gas tanks for grilling and other household uses. Yet pretty much throughout the industry, valuations are high, with many companies sporting substantial debt.

But through strategic acquisitions, Suburban tries to stand out from the crowd. Earlier this year, Inergy agreed to sell its retail propane business to Suburban in a $1.8 billion transaction that included cash, stock units, and debt. As a result, Inergy was briefly a major investor in Suburban before distributing 14.1 million Suburban units to Inergy unitholders. The deal closed in August, and Suburban has worked to integrate Inergy's customers into its fold.

For Suburban to improve, it needs to do a good job of capitalizing on the Inergy opportunity. With dividend investors counting on it to keep distributions high, Suburban needs a jump in sales to get 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 Suburban Propane to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

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

Fool contributor Dan Caplinger amd The Motley Fool have no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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