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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.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||26.6%||Pass|
|1-Year Revenue Growth > 12%||83.8%||Pass|
|Margins||Gross Margin > 35%||34.6%||Fail|
|Net Margin > 15%||(20%)||Fail|
|Balance Sheet||Debt to Equity < 50%||36.2%||Pass|
|Current Ratio > 1.3||1.81||Pass|
|Opportunities||Return on Equity > 15%||(41.5%)||Fail|
|Valuation||Normalized P/E < 20||NM||NM|
|Dividends||Current Yield > 2%||0%||Fail|
|5-Year Dividend Growth > 10%||0%||Fail|
|Total Score||4 out of 9|
Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.
Since we looked at Accuray last year, the company has kept its four-point score. The medical device maker has seen huge sales growth in the past year, but it came from an acquisition and thus far hasn't translated into consistent profitability.
The field of robotics has revolutionized the medical industry, and a host of companies are trying to take advantage. While Intuitive Surgical (Nasdaq: ISRG ) has used its da Vinci surgical systems to dominate prostate procedures and MAKO Surgical (Nasdaq: MAKO ) has focused on orthopedic joint procedures, Accuray now has two products -- its legacy CyberKnife, and the TomoTherapy line of systems it obtained in an acquisition almost a year ago. Both are used to fight cancer.
But Accuray can expect to see more direct competition in the years to come. So far, Intuitive, MAKO, and Hansen Medical (Nasdaq: HNSN ) have largely stayed out of one another's way, with Hansen specializing in catheter placement. But Varian Medical Systems (NYSE: VAR ) goes head-to-head in cancer treatment with devices designed to use radiotherapy and radiosurgical methods.
For Accuray to keep advancing, it needs to demonstrate its competitive advantage over Varian and other medical equipment makers. Given that Varian is profitable and Accuray isn't, that could well prove to be an uphill climb -- but if Accuray can follow the path of pioneer Intuitive Surgical, then it could get a lot closer to perfection eventually.
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 the best investments from the rest.
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