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Intuitive Surgical (NASDAQ:ISRG) is the Sunnyvale, California medical technology company whose DaVinci robot has revolutionized prostate cancer surgery and treatment of gynecological disorders. Explosive growth in the US, Europe, and now Asia, expansion into new applications such as head-and-neck surgery, cardiothoracic, and other procedures has nearly tripled earnings per share in the last three years. While analyst forecasts have been trimmed recently, the company has a long history of beating estimates and has bested forecasts by an average of 10% over the last few quarters.

Such stellar performance has not been lost to investors on Wall Street. Since the dark days of 2009, when prices fell sharply on fears of slowing growth (which were only briefly realized!) and concern over Obamacare and medical device taxes, the stock price has gone up nearly fivefold.


(Click to enlarge)

Source: www.bigcharts.com

What should investors make of the recent sell-off? Since early April's peak near $600 a share, the stock has drifted to a recent price of $485, a decline of nearly 20%.

A close look at the trailing PE ratio in the above chart shows the metric is close to recent levels which have presented buying opportunities. The lofty PEs of 2008 make the chart hard to visualize, so let's recast the chart showing price action for only the last four years.


(Click to enlarge)

The price corrections of 2010 and summer of 2011 took the trailing PE to 30x. These have been attractive purchase levels for the shares in recent years. Of course, one could be very aggressive and try to snag the shares dirt cheap by waiting for a PE in the teens, which prevailed in 2009. But those dark days are unlikely to revisit us any time soon.

Let's give the stronger overall market the benefit of the doubt, but be prudent by buying the shares at a 30x trailing PE level. Using Yahoo Finance data, if earnings for the current September quarter come in as expected at $3.50, then trailing 12 month earnings will be $14.50. At a PE of 30x, this suggests acquiring the shares at $435 a share. While this price includes some margin of safety, since the company has been beating estimates lately, it might be realistic since estimates are also being trimmed. Technical analysts might also note this is the point where the stock price touches a trendline connecting the lows of November 2010 and August 2011. Since this covers the entire period when it became clear to investors that earnings momentum has resumed after its 2009 funk, it is an valuation important guideline.

I recommend conservative investors place a limit order to buy the shares at $435 and monitor events closely. More aggressive investors might consider writing October puts; the $435 strike sells for $420, while you wait for events to take their course this fall. The earnings report comes several days before the option expires. Implied volatility on the options has already begun to rise as the stock price falls, and more importantly, as the earnings data approaches. Savvy investors familiar with Greeks and "Vega" might wish to wait until implied volatility rises further before writing the puts.


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Source: ivolatility.com

While the market might not cooperate and hand you Intuitive Surgical shares at these prices we select, long term investors know that patiently waiting for growth stocks to become available at reasonable prices pays off in the both reduced risk and greater returns. For now, stick to your guns and wait for ISRG at lower prices.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ISRG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.