Intuitive Surgical: 'Accident Prone' for Profits

Last Thursday morning I awoke to Intuitive Surgical (ISRG) launching like a space shuttle at Cape Canaveral. These are the moments of which investing dreams are made! Did I:

A) Get lucky;
B) Take a random walk down Wall Street; or
C) Use a blend of fundamental, technical, and management analysis to make myself prone to having a profitable accident?

The answer to this pop quiz is C. Although I first learned about Intuitive Surgical in 2004, I became a huge fan again last quarter after the company announced impressive earnings and business activity. When a popular stock in an exciting sector reports solid fundamental news, I categorize them as “accident prone” for profits. In other words, when a company is accomplishing the mission of growth and earnings, I am more probable to experience an upside surprise in the stock price.

However, fundamentals alone do not make a winning trade. Unfortunately, other variables can prevent strong companies from becoming strong stocks. Therefore, the next prong of my framework involves technical analysis. In this case, ISRG held price support at the $140 level:

Also note how all pullbacks occurred on lighter volume (red bars) than buying activity (green bars). This is a classic indicator that demand to buy shares is greater than supply to sell. And, my friends, stock prices are nothing more than the reflection of supply and demand for shares.

Many investors who use a blended fundamental and technical approach tend to stop at this point and pull the trigger. However, I have one more secret ingredient in my recipe: management analysis. This prong of the framework requires no knowledge of math or charts. It is simply a common-sensical thumbs up or down judgment like Commodus (Joaquin Phoenix) used to determine the fate of slaves at the Coliseum in the movie Gladiator.

In the case of ISRG, I happen to know management is world-class. One of my trusted contacts once worked on a project with the C-level executives and relayed the opinion: “These guys are more brilliant, savvy, and shareholder focused than a Fortune 50 company I recently worked with.” At this point you’re probably saying, “Great. How am I supposed to know that by reading the 10Q?” Although you can’t glean such knowledge from a company’s marketing materials, you can attend shareholder meetings, attempt to contact other employees, request contact with executives through Investor Relations, speak with top analysts covering the company, and take cues from trusted sources who do have superior access.

If you are a day trader, fundamental and technical analysis should suffice. However, if you hold stocks or options overnight, I strongly recommend you evaluate management. Otherwise, you are playing Russian Roulette with your hard earned money because every day there is another stock which loses a “surprising” 20-50% as a result of incompetent management.

As I write this, ISRG is up 45% since I bought it in May, and 10% more than when I was eating breakfast last Thursday. I have shed some profits and raised my stop-loss to guarantee a minimum level of gains. But so long as my three pronged framework spits out better results than HAL in 2001: A Space Odyssey, I will continue to ride this shuttle to the next level.

Disclosure: Long ISRG

Comments

[Anthony B]

Yea, those earnings were a nice surprise. I was hoping to get in lower, and was expecting the sales of Da Vinci systems to come down more as hospitals were supposedly cutting budgets. I think I remember they still sold 76 systems, down from 85 last year's quarter (from memory, might be a little off). Of course surgery procedure numbers are soaring as more doctors are trained to do surgeries on the Da Vinci.

I guess I missed the boat this time, I'll look to get in if we ever get back to $150. You got to have a strong stomach eating breakfast watching the ticker on this stock though, big moves.

2009 Jul 28 08:42 PM

[wall street cheat sheet]

Great points, Anthony. I would look for a pullback, a creation of a support area, and then go long with a stop-loss. The target would be getting back to the 220 area ...


On Jul 28 08:42 PM Anthony B wrote:

> Yea, those earnings were a nice surprise. I was hoping to get in
> lower, and was expecting the sales of Da Vinci systems to come down
> more as hospitals were supposedly cutting budgets. I think I remember
> they still sold 76 systems, down from 85 last year's quarter (from
> memory, might be a little off). Of course surgery procedure numbers
> are soaring as more doctors are trained to do surgeries on the Da
> Vinci.
>
> I guess I missed the boat this time, I'll look to get in if we ever
> get back to $150. You got to have a strong stomach eating breakfast
> watching the ticker on this stock though, big moves.

2009 Jul 28 09:55 PM

[hpski]

Questions: S&P still has them at a "Hold", 12 month target price $205. How could they be that disconnected with ISRG's potential? Also, I wonder why their B.O.D's haven't issued a stock split? Under a certain price, aren't they a take over target?

Thanks in advance!

2009 Jul 29 03:21 PM

[User 463241]

This stock ALWAYS retraces after a huge upward move. I'd be looking for a long entry around the $180-190 area.

2009 Jul 29 07:30 PM