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 MAKO Surgical (Nasdaq: MAKO ) 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 MAKO Surgical.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||332.9%||Pass|
|1-Year Revenue Growth > 12%||73.1%||Pass|
|Margins||Gross Margin > 35%||66.0%||Pass|
|Net Margin > 15%||(60.8%)||Fail|
|Balance Sheet||Debt to Equity < 50%||0%||Pass|
|Current Ratio > 1.3||4.07||Pass|
|Opportunities||Return on Equity > 15%||(46.8%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||5 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
With five points, MAKO Surgical hits the center of the table as far as its score's concerned. The company has come up with some revolutionary technology and has seen sales surge in recent years, but it still needs to find a way to get profitable.
MAKO Surgical has jumped on the trend toward robotic health care with its RIO system, which focuses on surgical joint repair. Ordinarily, surgeries like hip and knee replacements involve replacing the entire joint, which requires an in-depth invasive procedure. But MAKO's RIO replaces only the problem parts of the joint, replacing them with implants. Its MAKOplasty procedure is safer and less traumatic than full surgery, helping patients recover more quickly.
MAKO Surgical has a similar business model to pioneer Intuitive Surgical (Nasdaq: ISRG ) , whereby it makes money both from initial sales of the systems as well as ongoing revenue from the accessories needed for each procedure. But with an aging population, hip and knee replacement is only likely to get more necessary, with around 1.4 million procedures performed in 2009.
The problem for MAKO Surgical is that it's going up against established rivals like Stryker (NYSE: SYK ) , Johnson & Johnson (NYSE: JNJ ) , and Zimmer Holdings (NYSE: ZMH ) , all of which have a vested interest in holding off the competition. But if doctors keep climbing on board to increase procedure counts and system sales, then the stock has plenty of room to run.
Obviously, reaching profitability is the first step on the road to perfection for MAKO Surgical. But with favorable demographic trends behind it, the company could see that improvement come sooner than later.
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."