Is NuVasive the Perfect Stock?

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 if NuVasive (Nasdaq: NUVA  ) 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 NuVasive.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-year annual revenue growth > 15% 46% Pass
  1-year revenue growth > 12% 17.8% Pass
Margins Gross margin > 35% 81.5% Pass
  Net margin > 15% 15.4% Pass
Balance sheet Debt to equity < 50% 104.1% Fail
  Current ratio > 1.3 7.15 Pass
Opportunities Return on equity > 15% 17.7% Pass
Valuation Normalized P/E < 20 40.35 Fail
Dividends Current yield > 2% 0% Fail
  5-year dividend growth > 10% 0% Fail
       
  Total score   6 out of 10

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

With a score of six, NuVasive posts a fairly healthy showing. The company is a pioneer in spinal surgery, but it has gotten quite a bit of bad news lately.

NuVasive has developed a minimally disruptive procedure for doing spinal surgery, which requires delicate work in order to avoid major complications. According to the company, the procedure speeds return to normal activity while minimizing blood loss and the length of hospital stays. Although NuVasive doesn't use robotic technology for its procedure, its delicate nature invites comparisons with Intuitive Surgical (Nasdaq: ISRG  ) and MAKO Surgical (Nasdaq: MAKO  ) , both of which use tech-based intelligence for similarly sensitive surgical procedures.

Unfortunately, NuVasive recently lost a big patent infringement case against Medtronic (NYSE: MDT  ) . A jury awarded more than $100 million in damages to Medtronic, and the eventual amount could be even higher because the verdict only covers up to 2010. Moreover, the judgment calls into question NuVasive's future, as it will have to get a license from Medtronic to continue using its technology in NuVasive's products.

Meanwhile, though, NuVasive is trying to move forward. It recently announced a bid to buy Impulse Monitoring, whose technology could make doctors more willing to try NuVasive's products. Until the dispute with Medtronic gets resolved, however, investors are going to stay jumpy -- and NuVasive won't be able to prove that it can inch closer to perfection.

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.

Click here to add NuVasive to My 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 our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Medtronic. Motley Fool newsletter services have recommended buying shares of MAKO Surgical and Intuitive Surgical. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 04, 2011, at 11:23 AM, PRSWILL wrote:

    The only thing that makes Nuvasive and Intuitive surgical similar is the words "minimally invasive". There has been a lot of chatter lately about these two companies- many articles naming both of these business- which leads usa to wonder if there is a buy-out coming by Intuitive.

    The surgical approach for the Far Lateral procedure (XLIF) that NUVA pioneered is considered minimally invasive- but adding a robot to the equation will only add time to this procedure and while robots quiet some shaky hands, this procedure is being done primarily by younger, more aggresive surgeons willing to take chances in anatomy where they haven't been formally trained by universities- not companies.

    The bigger question is WHY did NUVA by a neuro monitoring company? Since inception, they have promoted and LEAD the far lateral market with their IOM Solution. Makes you wonder if there are issues with the system that haven't been fully disclosed, or if it's competitive pressure by Medtronic and others offering 3rd-party solutions with professionals - not reps- running the system.

    The spine market as a whole is shrinking- pricing pressures and reimbursement are driving down growth and putting pressure on margins. If Intuitive really wants to take a bite at this apple, they're going to need a total makeover in attitude. Their "swagger" that has driven the robotic market will NOT fly in spine. This should be interesting.

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