Is Accuray 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 Accuray (Nasdaq: ARAY  ) 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 Accuray.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 33.5% Pass
  1-Year Revenue Growth > 12% (4.5%) Fail
Margins Gross Margin > 35% 50.8% Pass
  Net Margin > 15% 1.6% Fail
Balance Sheet Debt to Equity < 50% 0.0% Pass
  Current Ratio > 1.3 3.08 Pass
Opportunities Return on Equity > 15% 1.9% Fail
Valuation Normalized P/E < 20 124.03 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   4 out of 10

Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.

Accuray only manages a mediocre score of 4. But the medical device company is on the cutting edge of cancer treatment and could easily see a bright future ahead.

Accuray is among the handful of companies moving to revolutionize how patients get medical treatment. While Intuitive Surgical (Nasdaq: ISRG  ) has automated invasive surgery techniques, Accuray provides radiological treatments that don't involve cutting patients open at all. Unlike Intuitive Surgical, though, Accuray faces plenty of competition. Companies including Siemens (NYSE: SI  ) and Varian Medical Systems (NYSE: VAR  ) have radiation systems that compete against Accuray's CyberKnife product.

In response to competitive pressure, Accuray made a bid to buy out TomoTherapy (Nasdaq: TOMO  ) for $277 million. That's a big move for a tiny company, but it would eliminate a competitor with almost as much future potential as Accuray has.

Accuray faces the same challenges as many small companies: high valuations that haven't yet fully panned out on the bottom line. But with demographic and technological trends at its back, Accuray could easily see itself moving toward 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.

Click here to add Accuray to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Intuitive Surgical is a Motley Fool Rule Breakers recommendation. We Fools may not 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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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 10, 2011, at 3:02 PM, surfish wrote:

    High valuation - you're kidding me.

    ARAY is worth much more.

  • Report this Comment On May 10, 2011, at 4:52 PM, SDG003C wrote:

    I have had ARAY in my portfolio for 3 years now and they cannot string together a couple of good qtrs.

    So to make things better they buy TOMO which has the same problem but even worse.

    I wish someone would just buy out ARAY.

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