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The past year has been extremely volatile for Intuitive Surgical (NASDAQ: ISRG ) , a stock once beloved by Wall Street and investors for its habit of producing strong growth quarter after quarter.
Recently, though, the company has been plagued by widespread concerns over the safety of its da Vinci surgical robots. These concerns transformed into panic when the Food and Drug Administration issued a warning to the company after inspections conducted in April and May revealed possible links to deaths.
Should investors avoid the stock at all costs? Or is the recent drop in stock price nothing more than a unique buying opportunity?
Storm clouds gathering
In light of the increased scrutiny, investors were warned that the second quarter, and perhaps the remainder of the year, would be difficult. These fears were realized when Intuitive Surgical posted weak second-quarter results, which showed that revenue clocked in at $578 million and earnings per share missed analyst expectations.
It's important to consider that even in an extremely difficult period, Intuitive Surgical still posted quarterly growth in both metrics. However, the results broke a four-year streak of double-digit quarter growth, and the market was clearly unimpressed.
For investors who'd rather not accept Intuitive Surgical's heightened level of headline risk, there aren't that many competitors to choose from. That's actually one of the merits of Intuitive Surgical's buy case; its da Vinci robots are a truly revolutionary, one-of-a-kind technology. The closest competitor to Intuitive Surgical is MAKO Surgical (UNKNOWN: MAKO.DL ) , which also produces robotic devices, specifically designed for the knee and hip.
It should be stated that MAKO is a much more speculative bet than Intuitive Surgical, due to its much smaller size and volatile results. MAKO holds a market cap of just $780 million and has not proven to be consistently profitable in recent years.
MAKO reported net losses every fiscal year between 2008 and 2012. The current year hasn't seen business conditions improve much. Although MAKO is reporting strong revenue growth -- 22% through the first half of the year to be exact -- the company's net loss expanded. MAKO reported a net loss of $0.48 per share through the first half of 2012, and a net loss of $0.63 per share through the first six months of 2013.
As a result, due to MAKO's questionable fundamentals and inability to turn a profit, investors aren't exactly getting a suitable alternative to Intuitive Surgical.
Of course, within the health care industry there are many stocks to choose from, and investors who still want entry into the medical devices space should consider Johnson & Johnson (NYSE: JNJ ) .
J&J is a good alternative to Intuitive Surgical because, although it's also a company heavily involved in medical devices, it offers a vastly different investing proposition. J&J is much more of a slow-and-steady type than Intuitive Surgical.
Quite simply, J&J is one of the safest stocks to buy. J&J is a $245 billion company by market capitalization and does not exhibit nearly the volatility in its underlying operations as Intuitive Surgical has over the past year.
Consider also that J&J is one of the premier dividend-paying stocks in existence. The company has increased its dividend for a spectacular 51 years in a row and yields 3% at recent prices. Furthermore, its rock-solid business model is exemplified by the fact that J&J is one of only four U.S.-based companies to hold the coveted triple-A credit rating from Standard & Poor's.
Johnson & Johnson is the company behind Listerine mouthwash and Band-Aids, and also has a significant medical devices segment. Therefore, J&J can offer investors exposure to the surgical device market with the added safety of strong consumer brands.
What should investors do now?
While I believe Intuitive Surgical's da Vinci robots are truly a revolutionary technology, it needs to be acknowledged that progress has been extremely slow in recovering from the tumultuous developments of the past year.
It is a difficult task for investors to endure an entire year of little to no growth from a stock that routinely posted double-digit growth in both sales and profits for so long. At the same time, investors can take solace in the fact that they're receiving a more advantageous buying opportunity than at any time in recent history. After trading above $580 per share as recently as February, the stock now exchanges hands for just $385 per share.
It's certainly true that Johnson & Johnson provides a less risky alternative than Intuitive Surgical. However, for patient investors, I believe Intuitive Surgical will deliver strong returns once it can find itself free of regulatory scrutiny, and that its current price represents a unique buying opportunity.
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