Don't let Intuitive Surgical cut your heart out

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Bobby Raines 03/24/2014

Spring is here, chronologically if not meteorologically. In the lull between earnings seasons it can be a good idea to take a look at the stocks in your portfolio and do a little cleaning.

Hopefully you haven't been sitting on stocks that have been steadily losing money, but if you're the kind of healthy, well-rounded person who doesn't obsess over every fluctuation in the market, things can easily slip a little without you noticing.

It can be hard to know whether a hiccup in a stock's price is a temporary setback, or a signal that the party is over. Sometimes dips present a buying opportunity, while sometimes it means it is time to take your money and move along.

The latter case may be true for Intuitive Surgical ( ISRG ). The company makes and sells the da Vinci Surgical System, which combines robotics and imaging technology to let surgeons perform complex procedures in a way that is minimally invasive. The concept is a great one: the less you have to cut someone open and disrupt the things you aren't operating on, the less healing they have to do after surgery.

These machines can be used for a wide variety of procedures, including a variety of heart procedures, gall bladder removal and surgery to correct esophageal reflux.

The stock struggled in 2013 after studies questioned the benefits of da Vinci procedures compared to other, less costly kinds of surgery. In particular, a Columbia University found that hysterectomies performed with the da Vinci system cost $2,189 more, on average, than laparoscopic procedures, while nor significantly reducing length of hospital stays or complication rates. This was significant because hysterectomies accounted for about 30% of all surgeries performed with the da Vinci system prior to the report.

A reduction in hysterectomies performed with the da Vinci system hurts the company in two ways. First, a reduction in hysterectomies will free up robots that could be used to perform other procedures, eliminating some of the demand for more systems. Second, hospitals may think twice about spending roughly $2 million on a surgery robot that may not get used that much.

Another possible strike against Intuitive Surgical is the company's own success. There are already 2,966 da Vinci Surgical Systems in the U.S. as of the end of 2013, an increase of less than 400 from the end of 2012. The company is trying to make up some of the decline in sales growth in the U.S. by growing sales internationally, but analysts are expecting growth to be slower that it was in recent years.


Chart courtesy of stockcharts.com

The company seems to be somewhat rattled by recent developments, as management declined to provide guidance for 2014, except to say it expects to see the number of procedures performed using its machines rise by between 9% and 12%, which is a decline from a 16% increase in 2013.  

Traders who don't believe in the stock's ability to rebound may want to consider a July 480/490 bear-call credit spread for a $1 credit. That's an 11.1% return, or 34.66% on an annualized basis (for comparison purposes only. This trade will return a full profit so long as the stock is below $480 at July expiration, giving it about 10% downside protection.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: ISRG

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