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 Edwards Lifesciences (NYSE: EW ) 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 Edwards Lifesciences.
|Factor||What We Want to See||Actual||Pass or Fail?|
|Growth||5-Year Annual Revenue Growth > 15%||8.5%||Fail|
|1-Year Revenue Growth > 12%||12.1%||Pass|
|Margins||Gross Margin > 35%||71.8%||Pass|
|Net Margin > 15%||15.5%||Pass|
|Balance Sheet||Debt to Equity < 50%||11%||Pass|
|Current Ratio > 1.3||2.58||Pass|
|Opportunities||Return on Equity > 15%||18.7%||Pass|
|Valuation||Normalized P/E < 20||55.34||Fail|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||6 out of 10|
Source: Capital IQ, a division of Standard and Poor's. Total score = number of passes.
Edwards Lifesciences gets a quite respectable score of 6. The heart-valve specialist may lead its industry, but the shares certainly aren't cheap at today's prices.
Edwards was originally part of Baxter International (NYSE: BAX ) , which spun off the company back in 2000. Although both companies have performed well since then, Edwards' return has dwarfed that of its former parent.
With its Sapien heart valve technology, Edwards goes up against big players in the industry, including Medtronic (NYSE: MDT ) and St. Jude Medical (NYSE: STJ ) . But Sapien has performed well so far in tests, with the New England Journal of Medicine last year giving the valve an endorsement that it should become the "standard of care" for heart patients who can't or refuse to undergo open-heart surgery.
Sapien has seen a successful launch in Europe, but it still hasn't received approval in the United States. The company expects the U.S. launch to come in the fourth quarter of this year. Although a big boost in revenue should follow, the stock has already largely priced in those gains, with a huge multiple to trailing earnings not truly reflecting the company's future potential.
Edwards is already a strong stock and could easily get stronger in the future. The company really needs to get over the hurdle of Food and Drug Administration approval first before it can take its shot at being a perfect stock.
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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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."