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 Hologic (NAS: HOLX) 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 Hologic.
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%
3 out of 10
Source: S&P Capital IQ. Total score = number of passes.
With only three points, Hologic doesn't paint a perfect picture for investors. The medical imaging company has seen growth slow substantially during the recession, although its future prospects may be getting just a little brighter.
Hologic has a fairly wide range of health-care operations. With everything from mammography systems and cervical cancer test diagnostics to bone density measuring devices, Hologic focuses on women's health care. It also developed a drug to reduce risks of singleton spontaneous preterm birth for KV Pharmaceutical (NYS: KV.A) , which took over all rights to the drug after it gained FDA approval.
Of course, the company has plenty of competition. In mammography, giants like General Electric (NYS: GE) and Fuji make competitive products. CR Bard (NYS: BCR) , Becton Dickinson (NYS: BDX) , and Abbott Labs (NYS: ABT) offer rival products in other lines of business.
Earlier this week, Hologic saw a nice gain after it announced earnings that beat expectations. Moreover, although the company issued full-year fiscal 2012 guidance below what analysts were hoping for, growth across the full spectrum of its operating units is definitely a good sign.
For Hologic to reach perfection, it ideally needs to see a healthier economy lead to more health-care spending. With forward earnings looking much more reasonable and the potential for improving returns on equity, Hologic could see major score improvement in the 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 contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Abbott Labs. Motley Fool newsletter services have recommended buying shares of Abbott Labs and Becton Dickinson. 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.