The Best Stocks for 2011: Intuitive Surgical

This article is part of our "Best Stocks for 2011" series where our Foolish writers pick their top stock ideas for the year ahead. Click here to see a review of last year's picks and our 12 recommendations for the year ahead.

Warren Buffett loves huge moats. He also likes to invest early and often, and the Oracle of Omaha buys when others are selling.

With all these investing strategies in mind, I wouldn't be surprised to see Berkshire Hathaway buying a large stake in Intuitive Surgical (Nasdaq: ISRG  ) right about now. It's the best investment I see at the end of the old year and the start of the new, and it fits the Buffettian template to a T.

Moat
Intuitive Surgical builds surgical robots. The da Vinci assisted-surgery system is the only platform of its kind, and it's surrounded by a massive pile of ironclad patents. The only real competition was eliminated in 2003, when the company merged with Computer Motion. Yahoo! Finance is usually pretty good at digging up rivals for comparison purposes, but Intuitive Surgical's "competitors" listing includes technology giants Toshiba and Hitachi (NYSE: HIT  ) , neither of which makes medical equipment that's anything like the da Vinci.

This is by far the most defensible moat I've ever seen. Intuitive Surgical's entire management team could disappear or get replaced today, and the business would hardly miss a beat. Since neither of those doomsday scenarios is likely to happen, we're looking at a massive competitive advantage -- because there really is no competition to speak of.

Growth
Investing early not only makes the most out of the time value of your money, but also lets you jump aboard growth stocks before they have fully matured. And we're still very early in Intuitive Surgical's remarkable history.

As impressive as the da Vinci's presence is in North America, the company has hardly even touched the rest of the world yet. In the company's most recent quarter, about 80% of new system sales were happening inside American borders, though growth has been strong in Europe as well.

Moreover, system sales are just the beginning of the money-making opportunity. Every system in operation will need disposable instruments and accessories on a regular basis, in the tried-and-true handle and razorblade model. That creates an exponential growth curve as accessory sales will eventually outgrow system sales. In the third quarter of 2010, 37% of total sales came from renewables; that's up from 32% two years ago. You can see where that trend is heading.                                                                  

Oh, and the FDA keeps expanding the company's addressable market when it approves new procedures.

In short, we're standing in the foothills of a long and profitable climb.

Value
Finally, 2010 was a very forgettable year for this stock. If you bought in a year ago, you're drinking red ink today while the broader market has advanced. Ouch.

That's terrible news for existing shareholders, but great for new investors. Intuitive Surgical has seen sales and profits accelerate over the last four quarters, yet the stock is cheaper now. That's what we call a fire sale, people.

Granted, you might balk at a trailing P/E ratio in the 30s. However, you're paying a premium for an unmatched combination of high growth and tremendous margins. Intuitive has fatter net margins than mature medical giant Medtronic (NYSE: MDT  ) while growing sales faster than small cap NuVasive (Nasdaq: NUVA  ) . You just don't see that combination very often.

What it all boils down to
If Warren Buffett thought high-tech medical systems were at all within his circle of competence, I truly believe he'd make a pass at Intuitive Surgical at this juncture. And even if he doesn't, major Berkshire holding Johnson & Johnson (NYSE: JNJ  ) could very well try to acquire the company. That's the kind of cash-rich Brobdingnagian it would take to have a chance of entering this company's market -- because the only way to do it is by buying the whole darn thing.

We individual investors have a very different view of Intuitive Surgical than those hapless quasicompetitors: It's the most-recommended stock in the history of our Rule Breakers newsletter, and the second-most profitable after growth phenom Baidu.com. And Intuitive Surgical's stock has never looked cheaper than it does right now.

It's the perfect stock for 2011, in my book, and I'm backing up my words with a real-money position less than 2 months old. I mean serious business here, folks. Please take our Motley Poll then scroll down to leave a comment.

Which is the best stock for 2011? See all 12 candidates here.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Intuitive Surgical and Baidu are Motley Fool Rule Breakers recommendations. Berkshire Hathaway is a Motley Fool Stock Advisor choice and a Motley Fool Inside Value selection. Johnson & Johnson is a Motley Fool Income Investor pick. The Fool owns shares of Berkshire Hathaway, Johnson & Johnson, and Medtronic. Motley Fool Alpha owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (10) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 30, 2010, at 2:58 PM, BedfordNH wrote:

    the da Vinci system is probably more than a year or two from expanding to more procedures than radical prostatectomies.

    Its drawbacks are:

    1. cost -- even if a hospital absorbs the inital couple of million for the system, it costs several hundred thousands per year to maintain. Other than urology and gynecology, no other specialty will be picking this up any time soon unless you can crank out case after case regularly to make up for the maintenance costs. This brings us to ...

    2. turnover -- each surgical case, simplistically, is like a packet of service sold; obviously the more you sell the more money you make. The robotic system takes a couple of hours too many to get ready for the next case. A 45-minute lap chole (probably the most common minimally-invasive surgeries done today) with a 30-min turnover allows your average surgeon to do maybe 4 or 5 per day; add the time it takes to turn over the robot, you are probably doing about half as many surgeries. That's assuming we are even approved for these common surgeries and surgeons are all flocking to do them (the initial excitement has cooled already).

    The above is just one aspect of the business, but until those things change, I am not sure there is a whole heck of a lot of growth to be had in the near future.

  • Report this Comment On December 30, 2010, at 3:08 PM, BedfordNH wrote:

    To clarify point #2 -- surgeons are not flocking to learn to perform the most common procedures with the da Vinci robot just yet.

    Also, the advantages of the robotic device are mostly lost on "easy" procedures (i.e., binocular vision and 3-D maneuverability are probably not going to improve the results of common procedures like the lap chole).

    Of course if you add up all the less common procedures that it may become more applicable for, you may still have great growth...

  • Report this Comment On December 31, 2010, at 8:28 AM, extraactor wrote:

    We find it really amazing, ONLY 2 COMMENTS prior to ours have been left.

    On the other hand, we are not so amazed.

    For there is nothing in the article about Jennifer Aniston, or a sports star cheating on his wife, or some politcian asking for a highway to the moon be built starting in their state and there is no way any conspiracy theory tying ISRG to anything perceived by the Left/Liberals to have been done years ago by "W"/Cheney is included in the article.

    So how can this article have any "real" importance

    Ah the New America. But that's okay, because we have been buying ISRG since 03 and are quite happy. See you at 500+ a share some day

  • Report this Comment On December 31, 2010, at 8:48 AM, pulmonarydoc wrote:

    I am a pulmonary physican the consensus among my fellow surgeons,at least in NYC.is that the robot is not cost effective and procedure limited. Maybe in academic institutions these could be a satus purchase but reembursements by third party payers will not be permissive for hospital purchases.

  • Report this Comment On December 31, 2010, at 10:06 AM, analystcpamba wrote:

    What's a physican? Also, what's a satus purchase? Is satus a word? I don't think so.

  • Report this Comment On January 02, 2011, at 2:30 PM, ceguice wrote:

    I'm sure he meant "status" whereby institutions can us it as a marketing tool for patient and physician recruitment. In the real world it better be faster, cheaper, or safer than existing techniques. Operating time and turnover time are very important. It is exciting technology though

  • Report this Comment On January 03, 2011, at 2:22 AM, commercenary wrote:

    To BedfordNH:

    To my knowledge, the daVinci system is already used for hysterectomies. Ask how many baby boomers are going to need these and similar gyn surgeries. A quick look at the daVinci web site shows the system also can be used for mitral valve repair (one of the most common heart surgeries) and other cardiac/coronary procedures.

    The large, regional hospital where I finished residency several years ago uses the daVinci system. Last I knew, it was primarily for urologic procedures. It's pretty amazing to see in action. At the time, a couple other physicians still needed to be scrubbed-in to help position trocars, trouble-shoot, etc. So: room for efficiency. But: patients get minimally invasive surgery. This reduces complications, thus length of stay, thus hospital overhead, freeing up beds for other patients, etc.

    It may be worth noting that Medicare is dramatically cutting back reimbursements for medical complications. Hospital patients are now being tracked for new UTIs, DVTs, pressure ulcers, etc. When these start in-hospital, the hospital and physicians don't get paid for them. In this milieu, minimally invasive surgery saves money.

    I recently bought into ISRG.

  • Report this Comment On January 03, 2011, at 10:20 PM, BedfordNH wrote:

    @ commercenary:

    I understand your point. However, minimally invasive surgery at this point in time is predominated by the more "old-fashioned" laparoscopic surgery, using a good-ol' laparoscope (now often in HD, but not 3-D yet). Robotic-assisted surgery, while incredible in its 3-D maneuverability, has not really been conclusively shown to further improve outcomes.

    Your points about reducing complications are very valid, but the more robust data are based on studies showing improved outcomes after laparoscopic surgery (versus open surgery). Even so, some recent data are pushing back against laparoscopic hernias or appendectomies. Data for robotic-assisted surgery are lacking yet.

    Your argument, in fact, can be applied just as well towards buying into companies such as Covidien and JNJ, which are major players in minimally invasive surgery.

    Sometimes "less is more." There is exciting research in NOTES (natural-orifice translumenal endoscopic surgery), a technology that allows the surgeon to remove a gallbladder or appendix (for example) without any incisions at all.

    ISRG's future, in my opinion, is pretty murky...

  • Report this Comment On January 04, 2011, at 12:19 AM, commercenary wrote:

    BedfordNH,

    Speaking as someone who has assisted with multiple surgeries, I absolutely agree that natural-orifice surgery will be a great development.

    I beg to differ, however, with your interpretation of "the data". For instance:

    1. Bell, MC et al. Comparison of outcomes and cost for endometrial cancer staging via traditional laparotomy, standard laparoscopy and robotic techniques. Gynecologic Oncology. 2008; 111(3):407-411.

    This article revealed reduced estimated blood loss (EBL), length of hospital stay (LOS) and time to return to normal activity with robotic surgery. Also, no significant difference in cost bewteen robotic and laparoscopic surgery.

    2. This was corroborated by: Veljovich DS, Paley PJ, Drescher CW, et al. Robotic surgery in gynecologic oncology: program initiation and outcomes after the first year with

    comparison with laparotomy for endometrial cancer staging. Am J Obstet Gynecol 2008;198:679.e1-679.e10.

    3. J Urol. 2009 Sep;182(3):866-72. Epub 2009 Jul 17.

    This multi-center study found reduced EBL, LOS, and complications in partial nephrectomies for renal tumors using robotic surgery. It also suggested that the benefits of robotic surgery are transferrable to experienced, not just naive, laparoscopists.

    Besides prostate and heart procedures, robotic surgery is pushing frontiers in bariatric, pediatric craniofacial/airway-related, and other surgical areas. It is typical that robotic surgery reduces EBL, LOS, complications, and time to return to normal function compared with laparoscopy. Research is burgeoning.

    Most surgeries indeed have been performed laparascopically, for some time. Also, it is true, as you mentioned, that inguinal hernia repairs and appendectomies can be better-done with the open technique. These two surgeries are exceptions rather than a trend, however. They are straightforward procedures that do not involve major blood vessels or major tissue disruption. Even cholecystectomies, for example, are done openly only when things like body habitus preclude a laparascopic technique, or for complications resulting from laparoscopy.

    Hundreds, and probably thousands, of medical centers worldwide utilize robotic devices for surgery - and specifically da Vinci systems. I think we are not even close to realizing the potential applications of robotic surgery. Telemedicine, for instance, is in its infancy. Natural-orifice surgery seems a perfect fit for robotic technologies.

    Success is always dependent on what a company does with the raw possibilities, and on the technological and business environment. Still (perhaps until we develop nanomedicine), I like the lay of the land for Intuitive Surgical.

  • Report this Comment On January 05, 2011, at 4:43 PM, bambam7715 wrote:

    I've had a 401k for years but since the economy tanked I decided to take matters into my own hands with my non 401k money. So, generally speaking, I'm a new Fool here. But...

    My day job is building and remodeling hospitals. There is a lot of positive feedback where the da Vinci is concerned. The bottom line is that doctors don't buy da Vinci robots, administrators do. And over half of the doctors I talk to like the robot.

    Building hospitals is a very unique area in the construction field. If there is play in the budget then they fill it with their wish list early. It always comes down to having to cut massive "wish list" items at the end. The da Vinci is always last on the list to be cut. I have yet to cut one to date. In fact I just installed a second da Vinci in my last remodel and I am scheduled to install a third on by 2013.

    I have to agree with the writer. The buzz is there and they are selling. At least to the projects I have done in the last 6-7 years. I don't see it ending anytime soon either.

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