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Is Edwards Lifesciences the Perfect Stock?

By Dan Caplinger - Updated Apr 6, 2017 at 9:30PM

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Finding companies that have all the right stuff can produce winners.

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 Edwards Lifesciences (NYSE: EW) 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 Edwards Lifesciences.

Factor What We Want to See Actual Pass or Fail?
Growth 5-Year Annual Revenue Growth > 15% 8.5% Fail
  1-Year Revenue Growth > 12% 12.1% Pass
Margins Gross Margin > 35% 71.8% Pass
  Net Margin > 15% 15.5% Pass
Balance Sheet Debt to Equity < 50% 11% Pass
  Current Ratio > 1.3 2.58 Pass
Opportunities Return on Equity > 15% 18.7% Pass
Valuation Normalized P/E < 20 55.34 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   6 out of 10

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

Edwards Lifesciences gets a quite respectable score of 6. The heart-valve specialist may lead its industry, but the shares certainly aren't cheap at today's prices.

Edwards was originally part of Baxter International (NYSE: BAX), which spun off the company back in 2000. Although both companies have performed well since then, Edwards' return has dwarfed that of its former parent.

With its Sapien heart valve technology, Edwards goes up against big players in the industry, including Medtronic (NYSE: MDT) and St. Jude Medical (NYSE: STJ). But Sapien has performed well so far in tests, with the New England Journal of Medicine last year giving the valve an endorsement that it should become the "standard of care" for heart patients who can't or refuse to undergo open-heart surgery.

Sapien has seen a successful launch in Europe, but it still hasn't received approval in the United States. The company expects the U.S. launch to come in the fourth quarter of this year. Although a big boost in revenue should follow, the stock has already largely priced in those gains, with a huge multiple to trailing earnings not truly reflecting the company's future potential.

Edwards is already a strong stock and could easily get stronger in the future. The company really needs to get over the hurdle of Food and Drug Administration approval first before it can take its shot at being a perfect stock.

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

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

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.

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Stocks Mentioned

Edwards Lifesciences Corporation Stock Quote
Edwards Lifesciences Corporation
$115.52 (3.18%) $3.56
Medtronic plc Stock Quote
Medtronic plc
$112.27 (1.84%) $2.03
St. Jude Medical, Inc. Stock Quote
St. Jude Medical, Inc.
Baxter International Inc. Stock Quote
Baxter International Inc.
$79.88 (0.81%) $0.64

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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