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 Edwards Lifesciences
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 Edwards Lifesciences.
|
Factor |
What We Want to See |
Actual |
Pass or Fail? |
|---|---|---|---|
| Growth | 5-Year Annual Revenue Growth > 15% | 10.7% | Fail |
| 1-Year Revenue Growth > 12% | 14.7% | Pass | |
| Margins | Gross Margin > 35% | 71.1% | Pass |
| Net Margin > 15% | 13.7% | Fail | |
| Balance Sheet | Debt to Equity < 50% | 12.9% | Pass |
| Current Ratio > 1.3 | 4.48 | Pass | |
| Opportunities | Return on Equity > 15% | 17.3% | Pass |
| Valuation | Normalized P/E < 20 | 52.94 | Fail |
| Dividends | Current Yield > 2% | 0% | Fail |
| 5-Year Dividend Growth > 10% | 0% | Fail | |
| Total Score | 5 out of 10 |
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Edwards Lifesciences last year, the company has lost a point. A drop in net margins is responsible for the score decrease, but the stock has managed to more or less break even over the past year.
Edwards has been known for its cardiovascular products ever since Baxter International spun the company off more than a decade ago. With a wide range of heart valves, blood-vessel catheters, and heart-monitoring systems, Edwards has built up a strong business poised to take advantage of prevailing demographic trends toward increased demand for health care from an aging population.
But for a long time, Edwards' Sapien Transcatheter Heart Valve has been a major driver of the company's future potential, in part justifying the stock's rich valuation. The company earned FDA approval for a limited selection of inoperable patients last November, but it's looking to serve a much broader set of patients. With an FDA advisory committee meeting expected later this month, a recommendation for approval could be a big step forward for the company; it could join giants Medtronic
But even as Edwards may see further revenue growth, it could also get hit by a new tax. Health care reform includes a 2.3% excise tax on medical-device makers. Already, Boston Scientific
For Edwards to push its score higher, it needs to have Sapien approved and its high reimbursement rate sustained. The stock is already priced for success, so anything less could be a huge blow for shareholders.
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.
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