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 Boston Scientific (NYSE: BSX ) 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 Boston Scientific.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||1.3%||Fail|
|1-Year Revenue Growth > 12%||(1.4%)||Fail|
|Margins||Gross Margin > 35%||64.0%||Pass|
|Net Margin > 15%||7.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||37.0%||Pass|
|Current Ratio > 1.3||1.70||Pass|
|Opportunities||Return on Equity > 15%||5.1%||Fail|
|Valuation||Normalized P/E < 20||16.87||Pass|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Boston Scientific last year, the maker of medical devices has gotten up off the mat and quadrupled its score. An improving balance sheet and a falling valuation helped account for the jump, although the stock hasn't performed well for quite a while.
Boston Scientific focuses on a range of medical devices, including heart defibrillators, catheters, and stents. Those industries have no lack of competition, with Abbott Labs (NYSE: ABT ) , St. Jude Medical (NYSE: STJ ) , and Medtronic (NYSE: MDT ) among the companies with similar product lines.
But the big problem that Boston Scientific has is an ongoing inability to execute on a turnaround that has lasted for years. After making several strategic mistakes and leadership changes, the company grabbed up former Johnson & Johnson (NYSE: JNJ ) medical device group chairman Michael Mahoney. But due to a non-compete agreement, Mahoney won't be able to assume the CEO role until late next year, putting the company in the awkward position of having an interim CEO for just over a year. Unlike Medtronic, which found General Electric (NYSE: GE ) health-care CEO Omar Ishrak to replace the exiting William Hawkins, Boston Scientific's choice to replace former CEO Ray Elliot isn't going to be the smoothest transition ever.
In the long run, Boston Scientific may finally get over its long-term problems. But having failed to take advantage of an obvious potential catalyst, the company doesn't look much closer to getting out of its restructuring woes. Until it does, it's hard to see Boston Scientific making much more progress toward 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.
Click here to add Boston Scientific 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."