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 Medtronic (NYSE: MDT) 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 Medtronic.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 6.8% Fail
  1-Year Revenue Growth > 12% 4.5% Fail
Margins Gross Margin > 35% 75.3% Pass
  Net Margin > 15% 20.6% Pass
Balance Sheet Debt to Equity < 50% 61.4% Fail
  Current Ratio > 1.3 1.90 Pass
Opportunities Return on Equity > 15% 21.5% Pass
Valuation Normalized P/E < 20 15.96 Pass
Dividends Current Yield > 2% 2.5% Pass
  5-Year Dividend Growth > 10% 17.5% Pass
  Total Score   7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Medtronic last year, the medical-device maker has kept the same seven-point score. The company's slow, steady growth has continued, as has its dividend growth and strong margins and returns on equity.

Medtronic is one of several companies that specialize in the medical devices that an aging population needs. Stryker (NYSE: SYK) largely stays away from Medtronic's cardiac expertise, instead focusing on orthopedics like hip and knee surgeries, as well as neurotechnology and spinal implants. But St. Jude Medical (NYSE: STJ) falls squarely into Medtronic's focus area -- although it hasn't been able to stand up to Medtronic's stronger new-device offerings.

Still, a weak economy has hampered growth for Medtronic. Between struggling hospitals and concerns about safety, sales of Medtronic heart defibrillators were weak. But newer offerings like its pacemaker and drug-eluting stent products helped stem that weakness and have a lot of promise for the future. The company is also seeking to cut costs and diversify into new areas, especially in emerging-market countries.

What makes Medtronic stand out is its dividend. Most of its peers have yields well below 2%, while heart-niche competitor Boston Scientific (NYSE: BSX) hasn't had the wherewithal to pay any dividend.

Longer-term, what may stand between Medtronic and perfection is a new group of competitors. Although MAKO Surgical (Nasdaq: MAKO) currently focuses on orthopedics, robotic surgery could spell big trouble for Medtronic -- if the latter doesn't pull the trigger first and start looking to develop its own system. If it beats potential competitors to the punch, though, Medtronic could become a recession-proof force to reckon with in the years ahead.

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.

If you're trying to find your way to a prosperous retirement, look no further. Learn more about the best investments to help you retire by accepting my invitation to receive the Fool's latest special report absolutely free. Inside, you'll learn the names of three promising stocks for the long haul. But don't wait -- click here and read it today.

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

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.