Why I Sold ISRG

This post's title is slightly misleading, as I sold only 50% of my holdings. Nonetheless, I did sell some shares, and the question is, "Why?"

I will leave off all the fundamental reasons, as they offer only measures of a company's presumed worth, and no understanding of why or how a stock moves, especially when it skyrockets as the shares of Intuitive Surgical (ISRG) have done recently. And there's the rub. Success, especially too much success, breeds its own destruction.

click to enlarge

Working backwards in time:

The shares have gone vertical the past week, rising to $334 from $234, or ~40% - this describes a blow-off move in price (specifically, a price move of 35% or more in three weeks or fewer).

The shares have moved to $334 from its last major (primary) base low of ~$85 (and, at which price I originally recommended the opportunity) since 10 January, a remarkable 300% IRR in only nine (9) months, and itself a blow-off move. These two items help make the 'opportunity' obvious to all, and which causes Jiminy Cricket to whisper in my ear, "Beware..."

The chart is peppered with breakaway gaps (highlighted) that occur predominately with each earnings report. After x number of breakaway gaps in y amount of time, an exhaustion gap is imminent, however ephemeral.

An exhaustion gap would create the potential for the dreaded weekly reversal, eminently possible to occur as early as next week.

The shares sell at 200% of its 200 day simple moving average (now $320+), an old and favorite institutional technique for selling position holdings, albeit one that is mechanical rather than intuitive.

None of the preceding points describe a stock that has reversed - or shows any bearish signs at all - only one that maxes out near term potential by borrowing from future gains. I believe this company has a bright future that includes a higher share price, much higher. But if I expected the shares to rise to, say, $1000 (assuming no splits) over the course of, say, five years and the market gifts me with the greatest portion of that move in only nine months, I am stupid if I fail to realize that gain. Why should I continue to hold my full position when all that remains, in my wildest bullish expectation, is a mere triple over the course of many years? That devolves to a risk: reward ratio of 1:1 - why risk a triple to gain only another triple, but over a far greater course of time?

So, yes, I expect further price gains; in fact, I hope they occur, as I remain long 50% of my holding for such a future. But today's uni-directional price move might bring with it more risk than I am willing to embrace, either as a deeper price correction or a lengthier than normal sideways base.

So I sold - some. Not at the perfect price, but at one that satisfies me. I established a value based mostly on technical analysis of the stock rather than fundamental analysis of the company that rings true for me - typical price action in advance of a reversal, x move in price in y amount of time, and that it always is better to sell when investors everywhere are buying. Doing this last item - and its obverse, buying when everyone everywhere is selling - means you sell maximum risk and purchase maximum reward. On its surface, this might appear counter-intuitive, I know, because I am selling, in this case, just as the good times begin.

The million dollar question we each attempt to answer is whether the good times really are just beginning (or whether the bad times will continue). Or whether this recent move in price for ISRG represents the end of the beginning, and ushers in a wholly different type of price trend. One that I prefer not to be long (i.e., slow as molasses price gains). I prefer to leave that type of investing for the value buyers.

Comments

[Eurotrader]

Great article and great reasoning. I looked at this stock over the weekend and did the same thing - by buying Jan puts against an underlying long positiion. I think that the vertical phase of this stock is about done by a varierty of additional technical factors - at least in the near-term...
Catalyst for a substantial technical retracement could be a rate cut disappointment on Wednesday (25 bp cut now with a hawkish FOMC statement stating inflation concerns) coupled with a poor employment number that might send most pre-FOMC longs out of the market.

[turdfurgeson]

Very well put. Great article.

[nitadmin]

i took my profits too. This company is no Google. This is the ceiling. If you are a long term investor you can keep this. I doubt it will fall under 290. You could keep this stock and write covee calls on it. Because it is such a volitale stock and its price is so high, call preimiums are very rich. Good luck

[borisb]

excellent.