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Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?
One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Intuitive Surgical (Nasdaq: ISRG ) fits the bill.
The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.
Some of the most basic yet important things to look for in a stock are:
- 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
- Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
- Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
- Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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 Intuitive Surgical.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||46.4%||pass|
|1-Year Revenue Growth > 12%||40.2%||pass|
|Margins||Gross Margin > 35%||72.8%||pass|
|Net Margin > 15%||25.1%||pass|
|Balance Sheet||Debt to Equity < 50%||0%||pass|
|Current Ratio > 1.3||4.87||pass|
|Opportunities||Return on Equity > 15%||19.9%||pass|
|Valuation||Normalized P/E < 20||30.96||fail|
|Dividends||Current Yield > 2%||0%||fail|
|5-Year Dividend Growth > 10%||0%||fail|
|Total Score||7 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
With seven points out of 10, Intuitive Surgical comes through with a high score. Once the company matures a bit and starts making payouts to shareholders, Intuitive could easy pop up to perfect-stock status.
Those who've followed the robotic surgical systems maker shouldn't be surprised at its performance, though. As first mover in a promising area with nearly limitless growth potential, Intuitive Surgical still has no serious competition. Accuray (Nasdaq: ARAY ) has its CyberKnife non-invasive surgical tool for cancer treatment, but it has only a fifth of the annual revenue of Intuitive Surgical. And MAKO Surgical (Nasdaq: MAKO ) , which is applying robotics to knee replacement, is even further behind on the growth curve.
Unfortunately, the whole medical-device industry has gone through some tough times during the recession. In its most recent quarter, Intuitive Surgical reported slower growth in procedure counts and lower sales of new systems. That jibes with what Medtronic (NYSE: MDT ) and Johnson & Johnson (NYSE: JNJ ) have seen recently as well. But given that most people can't put off medical procedures forever, it's likely that Intuitive Surgical and its peers will see demand growth return to its upward curve soon enough. In time, that could put the stock in line for future perfection.
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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