Has Stryker 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, then decide if Stryker (SYK -0.46%) 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 Stryker.

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

Since we looked at Stryker last year, the company has given back the two points it gained from 2011 to 2012. Rising valuations and falling revenue growth cost it the points, but the stock has managed to rise about 20% over the past year.

Like many medical-device makers, Stryker has had to deal with slow sales from cash-strapped hospitals and other medical facilities. It has done its best to grow despite those headwinds, with revenue rising 4% last year, and Stryker believes that an improving economy should make 2013 look more favorable.

But one challenge that has plagued the industry lately is a wave of product recalls. Johnson & Johnson (JNJ -0.46%) has had to recall its Adept hip implant, and with the company facing lawsuits due to past implant recalls from its DePuy division, it may have more legal liability ahead. Stryker has also had to recall of its Rejuvenate and ABG II implants and may end up having its own legal troubles as well.

Another problem for Stryker is the medical-device excise tax, which taxes companies based on total sales. Both Stryker and Boston Scientific (BSX -0.12%) have made decisions to lay workers off over the past year based on the Obamacare tax provision, and even industry giant Medtronic (MDT 0.62%) has shifted most of its hiring to markets abroad.

For Stryker to improve, it needs to take full advantage of demographic trends favoring orthopedics for as long as they last. If sales and net income bounce back, then Stryker could easily move back toward perfection in short order.

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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