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, then decide whether Teleflex (NYSE: TFX ) 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.
- Money-making 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 Teleflex.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||(5.8%)||Fail|
|1-Year Revenue Growth > 12%||14.3%||Pass|
|Margins||Gross Margin > 35%||43.2%||Pass|
|Net Margin > 15%||11.7%||Fail|
|Balance Sheet||Debt to Equity < 50%||51.2%||Fail|
|Current Ratio > 1.3||3.15||Pass|
|Opportunities||Return on Equity > 15%||6%||Fail|
|Valuation||Normalized P/E < 20||19.84||Pass|
|Dividends||Current Yield > 2%||2.4%||Pass|
|5-Year Dividend Growth > 10%||5.6%||Fail|
|Total Score||5 out of 10|
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With five points, Teleflex lands right in the middle of our scale. The once-diversified conglomerate has moved boldly to focus on medical devices, which is a highly competitive market.
Seven years ago, Teleflex started reorganizing itself to try to improve its margins and narrow its focus on its most profitable segments. As a result, the company sold off businesses including galvanized steel wire production and specialty chemical processing and started picking up more exposure to the medical field, which is its highest-margin segment. Now, medical products make up 80% of the company's revenue.
But even after its reorganization, Teleflex still has a tough road to walk. Although the company posts better results than CareFusion (NYSE: CFN ) , fellow competitors CR Bard (NYSE: BCR ) and Covidien (NYSE: COV ) have far stronger returns on equity and higher net margins, despite trading at roughly similar valuations.
Teleflex leads the way with regard to its strong dividend. But despite Teleflex's top current yield, medical device makers Stryker (NYSE: SYK ) , Baxter International (NYSE: BAX ) , and Becton Dickinson (NYSE: BDX ) have much more attractive growth rates on their dividends. If Teleflex wants to become a perfect stock, the company will need to find ways to grow its new core business while continuing to pump up its payouts.
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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Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."