MAKO Investors Getting Cut Out of the Loop

The world's top value investors love it when their best stock ideas are selling at bargain-basement prices. For those rarified investors, companies offering fire-sale prices become no-brainer buys. So regular investors like you and me would do well to emulate the masters and look at companies offering a "buy one, get one" sale on their stocks.

Surgical robot maker MAKO Surgical (MAKO.DL) has found sales of its systems falling behind estimates all year long, and then, right in the middle, it went and did a $40 million secondary offering that caught investors by surprise. With a $50 million line of credit already available, why go through a capital raise now? Management says it's merely a "spare tire," a chance to get money for a rainy day, particularly with a looming fiscal cliff.

Even if you accept this explanation, you'll still want to do more due diligence before buying in to see if this is an opportunity to pick up a quality stock at a severe discount.

MAKO Surgical snapshot

Source: FinViz.com. N/A = not available, MAKO Surgical doesn't pay a dividend.

Let's just make sure there's nothing more seriously wrong with it before you go and plug it into your portfolio.

Surgical strike
The third-quarter loss that MAKO reported earlier this month may have been significantly narrower than the year-ago period, but there's still a long road to travel before it reaches profitability, and the surgical robotics specialist may find itself confronted with a credibility problem that makes the process more difficult.

There have been a lot of complaints about MAKO's Rio software and the loss of tactile feedback during an operation. Earlier this year, the company noted that it had to undertake a review of whether it may have "inadvertently" forgotten to file medical reports with the Food and Drug Administration -- and found 105 such instances. It filed 120 reports a few days later. According to a report from BioLogic Equity Research, 85 of these were characterized as system malfunctions, with others classified as doctor error.

Yet very quietly and without any fanfare, MAKO notified the FDA in August that it recalled its Rio 2.4 software and replaced it with version 2.5 because of those malfunctions. Investors have only just discovered this because the letter was posted on the FDA website, though analysts at Piper Jaffray say it looks like a minor glitch that was previously disclosed. . Still, it makes you wonder why everyone was surprised by the news.

A taxing question
So it seems like there might have been a lot of reasons to do the capital raise when it did. Next year might not prove as hopeful as 2012 was, and this year was brutal. Moreover, starting Jan. 1, a 2.3% excise tax on medical device sales kicks in to help pay for Obamacare, wreaking havoc on device makers. Stryker's (SYK 0.09%) already announced it is cutting employees to save money, while Boston Scientific (BSX 0.48%) is cutting as many as 1,400 jobs and moving some operations to China. Earlier this year, Medtronic (MDT -1.41%) said the law will cost it between $125 million and $175 million annually.

For a company like MAKO struggling to gain profitability, losing millions of dollars in sales to pay the taxman could be devastating.

Hip-pointer
Amid higher taxes, fewer procedures, botched operations, and product recalls, MAKO stands the very real chance of getting run over. It lags behind industry leader Intuitive Surgical (ISRG -0.50%) in the number of procedures performed, and it lowered the number of knee and hip replacement procedures it expects to be performed, ostensibly because of superstorm Sandy. It previously expected to perform between 11,000 and 12,000 surgical procedures, but now anticipates somewhere around 10,200 to 10,600.

It's hard to see an immediate catalyst for MAKO at the moment. Its surgical robotics are undoubtedly groundbreaking, but there's more competition these days, and system issues and product recalls don't instill confidence. Even at its current discount, I can't recommend the stock, but let me know in the comments section below if you think MAKO Surgical can get its bearings again and rise to the occasion.