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 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%||3.3%||Fail|
|1-Year Revenue Growth > 12%||7.4%||Fail|
|Margins||Gross Margin > 35%||47.6%||Pass|
|Net Margin > 15%||(1.9%)||Fail|
|Balance Sheet||Debt to Equity < 50%||57%||Fail|
|Current Ratio > 1.3||5.15||Pass|
|Opportunities||Return on Equity > 15%||(8.8%)||Fail|
|Valuation||Normalized P/E < 20||23.51||Fail|
|Dividends||Current Yield > 2%||2%||Pass|
|5-Year Dividend Growth > 10%||3%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Teleflex last year, the company has dropped two points. Decelerating revenue growth and a richer valuation are to blame for the decline, even though the stock still managed to gain almost 20% in the past year.
In the past, Teleflex had a much more diversified business. But over the course of the past decade, the company has established itself as a leader in the medical device industry. With products that include catheters and breathing tubes as well as surgical and cardiac care equipment, Teleflex serves hospitals and other health care providers around the world.
Innovation remains a key part of the medical device industry, though. While the company considers CareFusion (NYSE: CFN ) and Covidien to be among its primary competitors, none of them has the truly cutting-edge technology that MAKO Surgical (Nasdaq: MAKO ) and Intuitive Surgical (Nasdaq: ISRG ) have used to vault into the mainstream consciousness. CareFusion, for instance, has also struggled from weak sales. Admittedly, though, given MAKO's extreme volatility, the benefit of Teleflex's relatively stable business model is that it's more dependable and reliable for investors.
Recently, Teleflex took a massive $332 million goodwill impairment charge in connection with the sale of its aerospace unit to AAR (NYSE: AIR ) . But the big question moving forward is whether Teleflex's strategy will pay off, or if investors will wish that its massive restructuring and refocusing of its business had never happened.
For Teleflex to improve, it needs to prove skeptics wrong. With a decent dividend yield and prospects for growth, Teleflex could easily reverse its score loss and move back in the right direction in the near future.
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.
Teleflex is a traditional play, but MAKO Surgical has revolutionized surgical procedures and has a lot more growth potential. With MAKO hitting an important moment in its history, will it survive and thrive or crash and burn? Take a look at the Fool's latest premium report on MAKO to find out the whole story, with a detailed look at both sides of the argument for and against owning the stock. Check it out today.
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