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 Intuitive Surgical (Nasdaq: ISRG) 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 Intuitive Surgical.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 37.8% Pass
  1-Year Revenue Growth > 12% 22.5% Pass
Margins Gross Margin > 35% 72.3% Pass
  Net Margin > 15% 28.2% Pass
Balance Sheet Debt to Equity < 50% 0.0% Pass
  Current Ratio > 1.3 4.62 Pass
Opportunities Return on Equity > 15% 21.3% Pass
Valuation Normalized P/E < 20 44.34 Fail
Dividends Current Yield > 2% 0.0% Fail
  5-Year Dividend Growth > 10% 0.0% Fail
  Total Score   7 out of 10

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

Since we looked at Intuitive Surgical last year, the company has maintained its seven-point score. Revenue growth has slowed modestly and the stock has seen its earnings multiple rise somewhat, but that largely reflects an incredibly strong 2011 for the stock.

Intuitive Surgical is the company behind the da Vinci robotic surgical system. With approved uses in prostate procedures and hysterectomies, da Vinci procedures jumped 30% year over year in its most recent quarter. Recurring sales for instruments and accessories rose 38%, which fits with the idea that as new surgical systems get sold, more customers will need increasing amounts of the supplies needed to perform procedures with them.

Although it's a pioneer in robotic medicine, Intuitive Surgical isn't the only company in the space. MAKO Surgical (Nasdaq: MAKO) focuses on hip and knee replacements with its RIO system, and that company is also seeing spectacular growth. Hansen Medical (Nasdaq: HNSN) has revolutionized robotics that help place, move, and control catheters.

But the big difference is that while neither MAKO nor Hansen is profitable, Intuitive Surgical most definitely is -- and looks poised to do even better coming out of the recession. Its growth is pegged at about 20% per year. That far outpaces the 7% to 10% levels that traditional medical device giants Medtronic (NYSE: MDT) and Stryker (NYSE: SYK) post -- showing that Intuitive Surgical has nearly unparalleled growth potential. Of course, those slower-growing companies also have more reasonable valuations, so you're paying up to buy shares of the fast-growing Intuitive Surgical.

What Intuitive Surgical needs to do to get even closer to perfection is to get to the point in its growth curve at which it's ready to start paying dividends. With more than $900 million in cash on its debt-free balance sheet, that day may come sooner than people think. For now, though, investors should be content to ride the growth wave as far as it'll take them on Intuitive 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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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 ."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Medtronic and MAKO Surgical. Motley Fool newsletter services have recommended buying shares of Intuitive Surgical, 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.