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.
What We Want to See
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.
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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