Is Stryker the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Stryker (NYSE: SYK  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • 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 don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. 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.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 9.7% Fail
  1-Year Revenue Growth > 12% 8.9% Fail
Margins Gross Margin > 35% 68.8% Pass
  Net Margin > 15% 17.4% Pass
Balance Sheet Debt to Equity < 50% 13.9% Pass
  Current Ratio > 1.3 4.73 Pass
Opportunities Return on Equity > 15% 18.5% Pass
Valuation Normalized P/E < 20 20.08 Fail
Dividends Current Yield > 2% 1.2% Fail
  5-Year Dividend Growth > 10% 41.8% Pass
       
  Total Score   6 out of 10

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

Stryker puts in a strong showing with six points. The medical device maker has demographic tailwinds pushing it along, and as the economy recovers, things may look even better for Stryker.

Stryker is best known for its orthopedic implants. With a focus on hip and knee replacement business, Stryker is well-poised to capitalize on the aging U.S. population. In orthopedic implants, Stryker is part of an oligopoly that includes Medtronic (NYSE: MDT  ) , Zimmer Holdings (NYSE: ZMH  ) , and Johnson & Johnson's (NYSE: JNJ  ) DePuy. But the company also gets more than 40% of its revenue from selling medical and surgical equipment, which is a less capital-intensive business.

What makes Stryker stand apart is its insider ownership. Insiders own more than 20% of the company, compared with minuscule percentages for its competitors. That may be partially responsible for its pricey valuation, which is significantly higher than J&J and Medtronic.

But another cause for optimism may simply be the company's prospects for the future. Last month, Stryker raised its guidance for 2011 and now expects earnings growth of about 12% for this year.

With a dividend that's lower than Medtronic and J&J, Stryker isn't the perfect stock. But as a long-term play on an aging population in need of more health care, it's worth a closer look.

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 Stryker to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Stryker and Johnson & Johnson are Motley Fool Inside Value recommendations. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Income Investor pick. The Fool owns shares of Johnson & Johnson, Medtronic, and Zimmer Holdings. Motley Fool Alpha owns shares of Johnson & Johnson. 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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