Medtronic stock: It's OK if you have a strong heart
— -- A: When you read about how the average lifespan of humans is getting longer, Medtronic is a big reason for that.
The company makes medical devices that help treat everything from diabetes to heart and spinal issues.
But while the company's products help patients feel better, investors who owned Medtronic's stock during the bear market don't feel much better.
At first, it looked as if they would sidestep the bear. Shares of Medtronic hovered in the $55 range in October 2007, as the bear market started, only to fall in November but largely recover in August 2008.
But Medtronic's shares have been vulnerable lately. Shares hit a 52-week high of $56.97 in August, and have since fallen to around $34.
Part of Medtronic's wild stock action has to do with the fact it's in the relatively defensive area of health care. When investors start feeling optimistic about the economy, they may sell medical stocks like Medtronic so they can buy into industries perceived to have a greater shot as faster growth.
Even so, Medtronic has been a strong performer over the years and deserves a closer look. Putting the stock through the four steps considered here:
Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading Medtronic's trading history back to 1980, we see the company generated an average annual compound rate of price appreciation of 20.6%. This is a high return; the S&P 500 posted a 10.1% average annual return in the same time frame, says IFA.com.
But here's the rub. If you owned Medtronic, you accepted higher risk — standard deviation — of 39.8 percentage points. That's much higher than the 15.5 percentage point risk of the S&P 500 during the period. So to get a 104% higher return you accepted 157% higher risk. That's not a great tradeoff.
Step 2: Measure the stock's discounted cash flow. Some investors decide if a stock is pricey by comparing its current price to the present value of its expected cash flows. It's a complicated analysis made simple with a system from NewConstructs. When I run Medtronic's stock, I find it's rated "attractive." In other words, the stock is inexpensive relative to the cash the company is expected to generate over its lifetime.
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