Has NuVasive Become 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 and then decide whether 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.
  • Moneymaking 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% 36.5% Pass
  1-Year Revenue Growth > 12% 16.2% Pass
Margins Gross Margin > 35% 76.8% Pass
  Net Margin > 15% (12.6%) Fail
Balance Sheet Debt to Equity < 50% 75.1% Fail
  Current Ratio > 1.3 2.75 Pass
Opportunities Return on Equity > 15% (14.2%) Fail
Valuation Normalized P/E < 20 100.30 Fail
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
       
  Total Score   4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at NuVasive last year, the company has lost 2 points. A big drop in margins and returns on equity are responsible for the plunge, even as the shares have gained roughly 35% in the past year.

NuVasive specializes in medical devices that allow surgeons to do spinal procedures with minimal disruption. Given the sensitivity of the spinal column, NuVasive's equipment results in less trauma and easier recovery.

But NuVasive has faced several problems. One is an ongoing legal battle with Medtronic (NYSE: MDT  ) . After a $100 million verdict to Medtronic this time last year, NuVasive now faces yet another lawsuit from the rival medical-device maker. Yet the news hasn't all been bad from the courtroom, as NuVasive won an appeal of a trademark infringement case filed by NeuroVision Medical Products, erasing a $60 million judgment.

The other problem NuVasive is dealing with is the new tax on medical devices that will take effect in 2013. CEO Alex Lukianov wrote a commentary in a San Diego newspaper condemning the tax, which will cost 2.3% of gross sales of medical devices and cause havoc not just on traditional device-makers like Medtronic but also on cutting-edge technology from MAKO Surgical (Nasdaq: MAKO  ) , Intuitive Surgical (Nasdaq: ISRG  ) , and NuVasive. Boston Scientific (NYSE: BSX  ) has gone so far as to announce layoffs as a result of the tax.

For NuVasive to improve, it needs to get its legal issues behind it and start focusing on maximizing profits from its products. If it can do that, then the company stands a reasonable chance of getting closer to perfection in the years ahead.

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.

NuVasive has some interesting technology, but robotic device-maker MAKO Surgical is at a crossroads right now. Find out which way the device maker is likely to go in the Fool's premium report on MAKO Surgical. You'll find out everything you should know about MAKO's RIO device and its promising future. Click here and get your copy today.

Add NuVasive to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of MAKO Surgical and Intuitive Surgical. Motley Fool newsletter services have recommended buying shares of MAKO Surgical and Intuitive Surgical. We Fools don't 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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