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 St. Jude Medical
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 St. Jude Medical.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||11.5%||Fail|
|1-Year Revenue Growth > 12%||10.7%||Fail|
|Margins||Gross Margin > 35%||73.9%||Pass|
|Net Margin > 15%||16.3%||Pass|
|Balance Sheet||Debt to Equity < 50%||67.7%||Fail|
|Current Ratio > 1.3||3.44||Pass|
|Opportunities||Return on Equity > 15%||21%||Pass|
|Valuation||Normalized P/E < 20||14.83||Pass|
|Dividends||Current Yield > 2%||2.3%||Pass|
|5-Year Dividend Growth > 10%||NM||NM|
|Total Score||6 out of 9|
Source: S&P Capital IQ. NM = not meaningful; St. Jude started paying a dividend in March 2011. Total score = number of passes.
Since we looked at St. Jude Medical last year, the company has kept its six-point score. Starting a dividend was a promising sign, although a rise in debt took the point away again.
St. Jude specializes in medical devices having to do with the human heart. With products to manage heart rhythm, repair heart valves, and provide atrial fibrillation, St. Jude sells its wares around the world, with roughly half of its sales coming from international markets.
Last week, St. Jude gave preliminary results for its fourth quarter. With a 4% jump in sales, the company said it felt comfortable with previous guidance for earnings of between $0.83 and $0.85 per share. However, the climate for medical devices has been hit-or-miss, with a weak economy creating some soft pockets for revenue at times.
St. Jude also faces significant competition from a select group of companies. Medtronic
In addition, a dispute with micro-cap Kensey Nash
St. Jude took a big step toward perfection when it initiated a big dividend in early 2011. Its 2%-plus payout vaulted it ahead of rival Stryker
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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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of St. Jude Medical and Medtronic. Motley Fool newsletter services have recommended buying shares of Stryker. 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.