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 Arctic Cat 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 Arctic Cat.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

(1.4%)

Fail

 

1-year revenue growth > 12%

27.8%

Pass

Margins

Gross margin > 35%

22.6%

Fail

 

Net margin > 15%

5.9%

Fail

Balance sheet

Debt to equity < 50%

0%

Pass

 

Current ratio > 1.3

1.82

Pass

Opportunities

Return on equity > 15%

20.5%

Pass

Valuation

Normalized P/E < 20

13.34

Pass

Dividends

Current yield > 2%

0%

Fail

 

5-year dividend growth > 10%

0%

Fail

       
 

Total score

 

5 out of 10

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

Since we looked at Arctic Cat last year, the company has seen its score soar by 3 points. Improved valuations, higher returns on equity, and faster revenue growth over the past year all contributed to the rise, and the stock has rewarded shareholders with a 50% gain over the past year.

Arctic Cat has endured a strange year. You'd think that with one of the warmest winters on record early in 2012, the snowmobile-maker would have been in a world of hurt. Yet as it turned out, its snowmobile sales soared 63% during its fiscal third quarter, matching rival Polaris and its own snowmobile strength during the period.

Still, by May, things had changed for Arctic Cat. The company posted strong revenue gains and a smaller-than-expected loss, but its fiscal 2013 outlook disappointed investors. With weakness in its all-terrain vehicle business, Polaris and Honda Motor seem to be getting the better of Arctic Cat in that growing niche. Even as Arctic Cat posted record-breaking earnings in its most recent quarter, it failed to boost its full-year projections as much as analysts had hoped, leading to further share-price declines.

Despite Arctic Cat's gains in early 2012, the company will do better if the weather cooperates. Fortunately, recent snowstorms point to brighter times ahead not just for snowmobile makers but also for snow control equipment maker Douglas Dynamics and even ski-resort operator Vail Resorts , both of which found themselves stuck in the mud during last winter's snowless season.

For Arctic Cat to keep moving forward, it needs its new models like its Wildcat 4 Sport ROV to perform well enough to hold off the competition. Combined with more snow, 2013 could look even brighter for Arctic Cat.

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.

Arctic Cat has promise, but we have a stock you might like even better. Find out which company The Motley Fool's chief investment officer picked as his No. 1 stock for the next year in our brand-new free report, "The Motley Fool's Top Stock for 2013." Please accept this limited-time invitation to get your copy. Just click here to access the report and find out the name of this stock today.

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

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

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool owns shares of Arctic Cat. Motley Fool newsletter services recommend Polaris Industries and Douglas Dynamics. 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.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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