This article is part of our Rising Star Portfolios Series.

Many gross potato chips have been eaten because of the wildly silly "five-second rule," which deems food suitable to eat if retrieved within five seconds of hitting the floor. Heck, I'm buying medical technology giant Medtronic (NYSE: MDT) for the Un Portfolio because of it. Of course, if that chip lands in a puddle of filth even for a millisecond, I'd pass; drop that chip on my guest bedroom floor (which sees no foot traffic) and I may well chow down.  

Un-vesting works the same way. Stocks fall on the floor from time to time, they collect some dirt and it's up to us to determine if that debris can be shaken off or if it has ruined the investment. With a little time and a flick or two, I think Medtronic -- just 10% off its 18-month low -- is a floor-touched chip worth eating. I'm putting 5% of the Un-Port's capital to work.

Allocating 5% to Medtronic The Five Rules Checklist
Know the BIG THREE Check
Identify the “Un” Check
Margin of Safety Check
Father Health vs. Father Time Check
Diversify Check


Curious about the Five Rules checklist? I won't un-vest without it. Get the details here.

In the business of pain
Medtronic is truly a great American success story. From its roots in 1949 as a medical equipment repair shop, it has grown into the world's largest independent medical technology company. Along the way, it has become the standard of care for products used in such areas as heart and spine surgery, diabetes, and nerve stimulation (for Parkinson's, epilepsy, and more).

We're talking cool stuff here: MRI-safe pacemakers, systems so a doctor can monitor a patient's implanted devices remotely, and mesh to patch up damaged skulls. The company sells more than 5,000 different products to hospitals and clinics worldwide.

The BIG THREE reasons I'm buying

1. Culture of innovation and deep pockets. Innovation is built into Medtronic’s DNA. The company has 4,500 engineers focused on innovation (400 have a PhD or MD). With research success a key component in determining bonuses, it should be no surprise that the company expects to launch 60 new products in the near future. Each year, Medtronic's dominance grows because it invests significantly more in research and development than its peers:

Company

Trailing 12-Month R&D Spending*

For Every $1 It Spends, 
Medtronic Spends

Zimmer Holdings (NYSE: ZMH) $215 $6.81
Stryker (NYSE: SYK) $373 $3.92
St. Jude Medical (NYSE: STJ) $592 $2.47
Boston Scientific (NYSE: BSX) $971 $1.50
Medtronic $1,460 --


Source: Data from Capital IQ, a division of Standard & Poor's. 
*In millions.

2. Three powerful macrotrends. The aging of the baby boomers, rising wealth in developing nations, and increasing access to health insurance are all huge trends that create a tailwind for Medtronic's business. The 60+ age demographic is expected to grow at an annual rate of 2.9% over the next decade; only 7% of Medtronic's business comes from emerging markets; and the majority of Medtronic's products are of the nonelective type that get great acceptance from insurance companies. The interaction of these three waves should buoy sales growth for years to come.

3. Shares are on sale. Paying nine times free cash flow and 10 times next year's expected earnings for a company of Medtronic's quality makes good, Foolish sense. The company generated nearly $19 billion in free cash flow over the past five years -- that's half its market cap! It's also been buying back shares, raising its dividend, and scooping up acquisitions and it is in great financial shape.

What's so "Un" about Medtronic?
Medtronic falls squarely into the "unloved" bucket of the investing world and has dropped 19% since the beginning of the year. While the drop hasn't been limited to Medtronic, the company's recent lowering of earnings guidance has drawn even more attention to the industry's three primary issues.

  • Depressed patient procedure volumes due to high unemployment, expiring COBRA transition coverage, and financial difficulties.
  • Increased development costs and lengthened new product cycles.
  • Uncertainty regarding the impact of health-care legislation.

Ti-i-i-ime, it's on your side (yes it is)
It's clear the market doesn't like Medtronic when we assess the 10-year expectations built into its stock price: revenue growth less than 3%, collapsing returns on capital, and very little success coming from the company's hefty investment in research. Lucky for us, the company's balance sheet looks great. A manageable debt load and nearly $4 billion in cash and investments mean we've got time on our side for Medtronic to perform and for Mr. Market to adjust his pessimistic view.

Risks
Medical technology generates high returns on capital. New competition and intellectual capital naturally want in on the action and firms have to defend their turf at high costs. Maintaining market share requires new products to be innovative and timely, but the costs of bringing those products to market is lengthening and rising because of new efficacy and testing demands from regulatory bodies. Such demands can slow a firm in responding to a competitor's product stealing market share.

On top of competitive pressures, playing nice with the insurance industry is a must because the industry relies on insurance companies to accept and pay for the surgeries that use its products.

That's a buy
Sure, things are tough for Medtronic right now: Economic, regulatory, political, and competitive challenges are making investors flee the stock. This is exactly the sort of opportunity the Un Port seeks out and why I'm excited to pick up shares. As we choose additional stocks, we'll be sure to watch our health-care exposure, but for now the Un Port has a clean (and cash-filled) slate that Medtronic fits into like a surgical glove (cue latex snapping noise)!

Share your thoughts on Medtronic's addition to the Un Portfolio here.