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 Stryker (NYS: SYK) 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 Stryker.
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%
8 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Stryker last year, the medical device maker has picked up two points. A boost in revenue growth and a slight contraction in the company's earnings multiple account for the improvement.
Stryker often gets missed in the shuffle of companies producing medical devices. Medtronic (NYS: MDT) has found new potential in its new pacemaker and drug-eluting stent businesses, despite seeing poor demand for its core defibrillator business. Moreover, with Intuitive Surgical (NAS: ISRG) and MAKO Surgical (NAS: MAKO) both serving up state-of-the-art robotic surgical systems, it's easier to get excited about them and their huge growth potential than to focus on Stryker and its more pedestrian offerings in the orthopedics area.
But Stryker matches up the best in the business in terms of the ideal combination of competitive advantages, sales growth, and dividend stability. Like most of its peers, Stryker has struggled as the recession has hit hospital capital-spending budgets. But despite missing estimates, Stryker's earnings and revenue both perked up in the fourth quarter, suggesting that the worst may be over for the health-care industry.
If that growth continues, then all Stryker needs to achieve perfection is to keep boosting its dividend. With so much going for it, Stryker deserves a close look from investors interested in only the highest-quality stocks.
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 MAKO Surgical and Medtronic. 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.