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 Zimmer Holdings (NYSE: ZMH) 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 Zimmer Holdings.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 5.0% Fail
  1-Year Revenue Growth > 12% 5.5% Fail
Margins Gross Margin > 35% 74.8% Pass
  Net Margin > 15% 17.1% Pass
Balance Sheet Debt to Equity < 50% 31.2% Pass
  Current Ratio > 1.3 3.78 Pass
Opportunities Return on Equity > 15% 13.5% Fail
Valuation Normalized P/E < 20 17.59 Pass
Dividends Current Yield > 2% 1.2% Fail
  5-Year Dividend Growth > 10% NM NM
  Total Score   5 out of 9

Source: S&P Capital IQ. NM = not meaningful; Zimmer announced its first dividend in December 2011. Total score = number of passes.

Since we looked at Zimmer Holdings last year, the medical equipment maker has seen its score rise by a point. Improved net margins are a promising sign for the future.

Zimmer makes products for hip and knee reconstruction, with recent market-share figures putting it slightly ahead of Johnson & Johnson (NYSE: JNJ) and Stryker (NYSE: SYK). With access to an aging population as well as one whose exercise practices can lead to joint problems, Zimmer is undoubtedly in a growth market.

But recently, the company has seen some major headwinds. Health-care insurers and government agencies are trying to cut back on reimbursement payouts, while a slow economy has led many people to put off procedures that aren't absolutely critical.

Moreover, high-technology competition is coming up from below. MAKO Surgical (Nasdaq: MAKO) has seen sales of its RIO orthopedic procedure equipment jump strongly in recent quarters. As MAKO and Intuitive Surgical (Nasdaq: ISRG) have increased their penetration into different surgical procedures, patients and doctors are getting more comfortable with the systems. Their success will eventually threaten lower-tech solutions like Zimmer's, forcing Zimmer to take steps to innovate itself.

Zimmer's recent adoption of a dividend payout is a move in the right direction. But what will really make the difference for Zimmer is the potential growth from a recovering economy. If it can beat back its competitors, Zimmer could get a lot closer to perfection 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.

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