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 and then decide whether St. Jude Medical 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.
Moneymaking 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 St. Jude 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 9
Source: S&P Capital IQ. NM = not meaningful; St. Jude paid its first dividend in March 2011. Total score = number of passes.
Since we looked at St. Jude Medical last year, the company broke its string of 6-point showings and lost a point, as net margins slipped. The stock has also struggled, posting a flat performance over the past year despite generally favorable conditions for the overall stock market.
St. Jude had a mixed year in 2012. With landmark events like marketing its Trifecta heart valve in Japan early in the year and marking the first use of its Portico transcatheter heart valve in October, St. Jude has clearly continued to move forward with promising innovations. It continues to do so, moreover, challenging Medtronic in the renal denervation system industry with its EnligHTN system, which St. Jude claims is twice as effective as Medtronic's device in cutting blood pressure.
Yet despite sales gains in Asia, St. Jude's international sales declined overall, with a strong U.S. dollar contributing to economic weakness. Moreover, competition remained fierce, with several peer companies coming out with new device of their own.
St. Jude also suffered a specific setback when its Durata line of defibrillator leads raised concerns from FDA regulators about its manufacturing process. Although St. Jude has promised to deal with these issues, the setback opens the door to rival Boston Scientific to push its Ingevity pacemaker lead as an alternative.
Moreover, analysts have identified potential threats not just to St. Jude but to the entire medical device industry. The medical-device excise tax of 2.3% of total revenue took effect this year, and that could be devastating for St. Jude and its peers. Yet the bigger issue hitting St. Jude and its peers is the idea that medical devices may actually be inferior to drug therapy in generating favorable outcomes for conditions like heart ailments.
For St. Jude to improve, it needs to find ways to get in front of its rivals with more revolutionary products. Otherwise, the decline it suffered could be the first of many steps St. Jude takes to move further away from perfection.
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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The article Has St. Jude Medical Become the Perfect Stock? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Medtronic and St. Jude Medical. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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