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
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.
|
Factor |
What We Want to See |
Actual |
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
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
Longer-term, what may stand between Medtronic and perfection is a new group of competitors. Although MAKO Surgical
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.
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Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of MAKO Surgical, Medtronic, and St. Jude Medical. Motley Fool newsletter services have recommended buying shares of Stryker and MAKO Surgical. 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.
