Why MAKO Won't Be in My 2013 Portfolio

At the beginning of 2012, I set out to form The World's Greatest Growth Portfolio.  Though I can't promise it will always live up to its moniker, the portfolio has returned 23% in just 11 months, beating the S&P 500 by about 9 percentage points.

A few weeks ago, I outlined  exactly how I would go about building my portfolio for next year: Invest first and foremost in companies that demonstrate exceptional levels of innovation, with special emphasis given to those that I believe will be around decades from now.

Today, I'm going to look at MAKO Surgical (Nasdaq: MAKO  ) , one of my portfolio's worst performers from 2012. Read to see what I plan to do with it next year, and later I'll offer access to a special premium report on the medical company.

A rough year
MAKO's Rio Surgical robots have the potential to help a lot of aging patients stay mobile late into their twilight years. The machines help craft partial knee and hip replacements that better align to the individual contours of a person's joints.

With the aging boomer population entering retirement but showing a desire to stay as active as ever, the company's procedures would be readily adopted. In fact, many believe that MAKO could one day be the next Intuitive Surgical (Nasdaq: ISRG  ) , whose daVinci Robotic System has been readily adopted by hospitals across the globe over the past decade.

Unfortunately for investors, the tale of this year's tape has not played out to meet the rosy picture mentioned above. The bad news started in early May, when the company announced that it had fallen short of even its low-end sales predictions. The biggest problem came from the fact that it sold only six Rio Systems in early 2012, a yearly drop from 2011.

The bad news continued during the next earnings release in July. Rio System sales again came in low, and when taking the whole year into account, system sales were again down on a yearly basis.

For larger, more mature medical companies such as Johnson & Johnson (NYSE: JNJ  ) , a drop like this might not be too much to worry about. But for a small company that is trying to convince the medical community that its product is worth using, shrinking sales are considered a major red flag. It even led one Fool to compare MAKO to struggling Hansen Medical (Nasdaq: HNSN  ) , as a "cautionary tale  of what can go wrong if adoption fails to materialize in a meaningful way."

Room for a revival
Of course, just because a stock drops doesn't mean that you should forget all about it. In fact, sometimes that can be just the time to buy in.

As fellow Fools Dave Meier and John Reeves wrote, they think MAKO is just at a transition point in the adoption curve of Rio Systems. In their opinion, if the company can see its product through this tough time and enter mainstream medical markets, it could gain wide acceptance.

Source: Technology Adoption Life-Cycle by Infrae.

What's a Fool to do?
I'm no medical expert, and I will readily acknowledge that now could be just the right time to be buying into MAKO Surgical. But the bottom line is that we've got a company with management that's having a tough time understanding where it is on the adoption curve. It helps explain why MAKO needed a secondary offering to raise cash  late this year.

If I'm going to be investing in high-risk/high-reward companies, I need to know that the management is top-notch; otherwise, I just don't see how it can make its product a breakthrough success.

For those reasons, and because I think there are simply better options out there, I don't think MAKO will have a spot at the table in 2013 for my growth portfolio.

Obviously, the sell-off of MAKO Surgical shares has many wondering whether the potential growth prospects of the robotic surgery company make this stock a buy or a stock to stay away from.

If you'd like a second opinion to answer this question, Fool.com analyst and MAKO expert David Meier has authored a premium research report covering all of the must-know details on the company, including key areas to watch and risks looming in the future. As an added bonus, David will keep you informed with a full year of updates and guidance on MAKO Surgical as news breaks. Click here now to learn more and start reading. .


Read/Post Comments (7) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On December 17, 2012, at 10:40 PM, kthor wrote:

    maybe someday .......

  • Report this Comment On December 18, 2012, at 9:12 AM, Dawgpac wrote:

    Despite MAKO's troubles this past year, they still made the 2012 Deloitte Fast 500 List of Fastest Growing Companies. MAKO is listed at #1 among Medical Decice makers and #18 overall (Tesla is #1). Not too shabby for a company making that "transition". Bot sales appear to be back on track as the hire of Intuitive Surgical's commercial sales guru finally appears to be gaining traction with system sales. Procedures continue to ramp and each one brings in $5000 to the company's coffers. Considering that MAKO went public around $8 a share, today's price is a steal.

  • Report this Comment On December 18, 2012, at 11:45 AM, robmxa wrote:

    Really like Mako, buying more here.

  • Report this Comment On December 18, 2012, at 12:14 PM, IdahoAve wrote:

    mine either

  • Report this Comment On December 18, 2012, at 7:07 PM, TruffelPig wrote:

    Much too late for me to sell - I have a huge position of this wonder stock according to Motley Fool recommendation by some. I do think it will recover in 2013 and get to a $20-30 level and probably up from there. Business seems to be back on track. Last earnings were ok (not great hey, but ok).

  • Report this Comment On December 18, 2012, at 7:08 PM, TruffelPig wrote:

    Btw, I am NOT whining :). You have some winners and some losers in spec plays. Typically more losers than winners but the winners make a couple 100%. I made a ton of money on PPHM. Very solid company - cough cough........

  • Report this Comment On December 22, 2012, at 3:54 PM, ChristopherHamel wrote:

    I agree this is a broken stock right now but believe management can fix it and get it on track again

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