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 Zimmer Holdings (NYSE: ZMH ) 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 Zimmer Holdings.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||5.0%||Fail|
|1-Year Revenue Growth > 12%||5.5%||Fail|
|Margins||Gross Margin > 35%||74.8%||Pass|
|Net Margin > 15%||17.1%||Pass|
|Balance Sheet||Debt to Equity < 50%||31.2%||Pass|
|Current Ratio > 1.3||3.78||Pass|
|Opportunities||Return on Equity > 15%||13.5%||Fail|
|Valuation||Normalized P/E < 20||17.59||Pass|
|Dividends||Current Yield > 2%||1.2%||Fail|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful; Zimmer announced its first dividend in December 2011. Total score = number of passes.
Since we looked at Zimmer Holdings last year, the medical equipment maker has seen its score rise by a point. Improved net margins are a promising sign for the future.
Zimmer makes products for hip and knee reconstruction, with recent market-share figures putting it slightly ahead of Johnson & Johnson (NYSE: JNJ ) and Stryker (NYSE: SYK ) . With access to an aging population as well as one whose exercise practices can lead to joint problems, Zimmer is undoubtedly in a growth market.
But recently, the company has seen some major headwinds. Health-care insurers and government agencies are trying to cut back on reimbursement payouts, while a slow economy has led many people to put off procedures that aren't absolutely critical.
Moreover, high-technology competition is coming up from below. MAKO Surgical (Nasdaq: MAKO ) has seen sales of its RIO orthopedic procedure equipment jump strongly in recent quarters. As MAKO and Intuitive Surgical (Nasdaq: ISRG ) have increased their penetration into different surgical procedures, patients and doctors are getting more comfortable with the systems. Their success will eventually threaten lower-tech solutions like Zimmer's, forcing Zimmer to take steps to innovate itself.
Zimmer's recent adoption of a dividend payout is a move in the right direction. But what will really make the difference for Zimmer is the potential growth from a recovering economy. If it can beat back its competitors, Zimmer could get a lot closer to perfection in the years ahead.
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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