Is IBM the Perfect Stock?

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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 IBM (NYS: IBM) 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:

With those factors in mind, let's take a closer look at IBM.

Factor

What We Want to See

Actual

Pass or Fail?

Growth5-Year Annual Revenue Growth > 15%3.4%Fail
 1-Year Revenue Growth > 12%7.4%Fail
MarginsGross Margin > 35%46.4%Pass
 Net Margin > 15%14.7%Fail
Balance SheetDebt to Equity < 50%128.3%Fail
 Current Ratio > 1.31.18Fail
OpportunitiesReturn on Equity > 15%69.3%Pass
ValuationNormalized P/E < 2016.68Pass
DividendsCurrent Yield > 2%1.7%Fail
 5-Year Dividend Growth > 10%24.6%Pass
    
 Total Score 4 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With 4 points, Big Blue doesn't look all that big. But even if the tech giant's high-growth days are over, IBM is proving that it still has what it takes to compete in the industry.

IBM is well known for its hardware, spanning generations from electric typewriters to PCs and mainframe computers. What has helped IBM survive and thrive, however, is its increasing vertical integration, by which the company aims to deliver not just hardware to help customers establish a technology infrastructure but also the software and services they need to manage and maintain it.

That strategy has given IBM two things. First, it's helped IBM boost its margins over the years, helping with profitability. More importantly, IBM now has a moat against both hardware sellers Hewlett-Packard (NYS: HPQ) and Dell (NAS: DELL) and software giant Oracle (NAS: ORCL) , whose purchase of Sun Microsystems put it in position to compete against IBM.

Another source of strength comes from IBM's reach around the world. With almost two-thirds of its revenue coming from outside the Americas, IBM has more geographical diversity than even tech consultant Accenture (NYS: ACN) . In addition, while many tech companies either pay no dividend at all or are just now getting on the dividend bandwagon, IBM has been raising its dividend for 15 straight years.

With only modest growth and a decent amount of leverage on its balance sheet, IBM may find that its days of topping the perfect-stock list are gone for good. But the stock is still worth considering, especially for conservative investors who prefer tried-and-true companies with good income prospects.

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.

Add IBM toMy Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our13 Steps to Investing Foolishly.

At the time this article was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Oracle and IBM.Motley Fool newsletter serviceshave recommended buying shares of Accenture. 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 Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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