Stopped out of balance of ISRG position

By Travis Johnson, Stock Gumshoe, January 15, 2009

I sold my remaining shares of Intuitive Surgical today — I had been quickly stopped out of half of the position a while back but held the other half. Today, the much wider stop loss for the remainder of the shares was hit and I’ve cleared the position from my portfolio.

I still like Intuitive Surgical as a five-year play, but now that they have confirmed that it will be a difficult year for selling new da Vinci systems, which still drive much of their sales, it seems a poor time to hold on. It’s quite possible that ISRG will lose more of its growth premium over the coming months as more weakness in hospital capital budgets brings poor system sales numbers.

If this economic weakness had come a few years later, it would have probably been materially different for Intuitive Surgical — they are in the process of becoming a company that profits primarily from selling accessories and service for their expensive surgical robots, a high margin “razor blade” business that should continue to make them profitable for many years — after all, usage of the machines is still climbing, and the patient pool for their primary surgeries in prostatectomy and hysterectomy is only growing.

But right now, Intuitive’s valuation still depends on continuing growth of system sales, not just continued procedure growth and accessory sales (each surgery uses “disposable” tools that must be bought from ISRG). Weakness in system sales in a weak economy means that some of the other optimistic projections for ISRG also get pushed out a bit further into the future. Now that I’ve sold the shares, I’ll hope that people give up on them entirely and the valuation premium recedes so I can consider purchasing the shares back.

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