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 MedAssets (NAS: MDAS) 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 MedAssets.
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 9
Source: S&P Capital IQ. NM = not meaningful due to insignificant net income. Total score = number of passes.
With only three points, MedAssets isn't running as smoothly as it could be. But the company is in a hot area of the health-care industry and has plenty of growth potential for the future.
MedAssets is helping to bring technology to the medical industry, with its health-care information services for hospitals and other health-care providers. With rising health-care costs and reform focused on maximizing efficiency in the industry, IT solutions have played an increasing role in trying to restructure and streamline hospital operations.
MedAssets is far from the only company trying to make health-care facilities run smoother. But competitors Cerner (NAS: CERN) , Quality Systems (NAS: QSII) , and Computer Programs & Systems (NAS: CPSI) all have businesses that involve putting health records into electronic form. By contrast, MedAssets focuses largely on internal finance areas like supply chain analysis and cost management as well as reimbursement tracking. That differentiation has allowed MedAssets to do well at times when other health IT companies fell flat, but its specialization helps distinguish MedAssets from Accenture (NYS: ACN) and other big consultants that dabble in the industry.
Back in February, shares of MedAssets soared on rumors that the company had hired a Wall Street firm to look into doing a leveraged buyout. So far, though, those rumors haven't amounted to action, but the company keeps producing strong results -- and raised its full-year guidance last week.
For MedAssets to keep improving, it needs to translate its growth into bigger profits. Once it does that, it can go to work at boosting its balance sheet and moving closer to perfection in the years to come.
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. Motley Fool newsletter services have recommended buying shares of Accenture and Quality Systems. 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.
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