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 Medtronic (NYSE: MDT) 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 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 Medtronic.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 7.9% fail
  1-Year Revenue Growth > 12% 4.2% fail
Margins Gross Margin > 35% 76% pass
  Net Margin > 15% 20.2% pass
Balance Sheet Debt to Equity < 50% 71.3% fail
  Current Ratio > 1.3 1.68 pass
Opportunities Return on Equity > 15% 22.4% pass
Valuation Normalized P/E < 20 14.52 pass
Dividends Current Yield > 2% 2.4% pass
  5-Year Dividend Growth > 10% 18.7% pass
  Total Score   7 out of 10

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

Medtronic clocks in with a very good score of 7. But even though the numbers look good, the stock hasn't performed as well as you might expect.

At first glance, that may seem odd. With strong margins and returns on equity translating to a healthy and growing dividend, the company seems to justify a higher earnings multiple than what the market is giving it.

Trouble has hit Medtronic recently, though, as its flagging growth numbers indicate. Across the industry, patients have been getting fewer procedures as the economic slowdown discourages any medical spending that isn't vital. Meanwhile, it's taking longer to develop new products, and the overhanging uncertainty over the new health-care law continues to weigh on the sector. The unfavorable environment has forced Medtronic to cut guidance for its current fiscal year.

Despite those hurdles, Medtronic remains at the forefront of innovation. It plans to introduce 60 new products over the next two years, outpacing the combined R&D investment of competitors Stryker (NYSE: SYK), St. Jude Medical (NYSE: STJ), and Zimmer (NYSE: ZMH). Yet on a normalized basis, Medtronic is more attractively priced than any of those three companies.

For long-term investors, current share price weakness may well be an opportunity. With favorable demographics supporting future medical device use for decades to come, Medtronic is arguably the best positioned to take advantage. Medtronic isn't perfect, but it's worth a closer look for value-oriented investors.

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