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 Zoll Medical (NAS: ZOLL) 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 Zoll Medical.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
5 out of 10
Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.
With five points, Zoll Medical isn't lighting up the scorecard. The medical device maker has seen its shares plunge in recent months, but the move could be overblown.
Zoll is a pioneer in the field of medical devices designed to resuscitate patients. For years, the company has put its heart defibrillators and AutoPulse cardiac support pump up against competing products from Medtronic (NYS: MDT) and the medical division of Philips Electronics (NYS: PHG) . More recently, Zoll's LifeVest product was a big contributor to Zoll's strong performance in its fiscal second-quarter this year.
Shareholders, however, have gotten quite a roller-coaster ride in recent months. After soaring in response to continued success in its most recent quarter, shares then plunged after Zoll said that Medicare might not provide reimbursement for as many LifeVest uses as it had initially hoped. Although rivals including Boston Scientific (NYS: BSX) and CONMED (NAS: CNMD) have also seen pressure over the potential for overall government health-care spending cuts, neither has taken as big a hit as Zoll.
For Zoll to get back on its winning path, it needs to get a positive resolution to its Medicare woes. With strong products and demographic trends toward an aging population in its favor, Zoll could easily start rising back toward perfection in the near future.
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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At the time thisarticle was published Fool contributorDan Caplingerdoesn't own shares of the companies mentioned. The Motley Fool owns shares of Medtronic. 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 adisclosure policy.
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