When considering any stock for your portfolio, don't be swayed just by the positives. Examine its pros and cons, and decide whether it's possible upsides outweighs its risks. Let's take a look at MAKO Surgical (Nasdaq: MAKO ) today, and see why you might want to buy, sell, or hold it.
Like Intuitive Surgical (Nasdaq: ISRG ) , which has been a multi-bagger for many Fools ever since our Rule Breakers newsletter service recommended it, MAKO is in the business of making robotic surgery equipment. Over the past year its stock has surged about 54%.
The first reason to consider buying into MAKO is its line of business. It's hard to argue with robotic surgery, as it's less invasive and lets patients heal faster. Indeed, MAKO's recent revenue growth rates reflect the fact that hospitals are buying more and more of its machines:
- one-year average annual revenue growth rate: 91%
- three-year average annual revenue growth rate: 206%
- five-year average annual revenue growth rate: 322%
The business model relies not only on growing sales of machines to hospitals, but also on generating reliable recurring revenue, as those hospitals keep signing up for service contracts and keep buying consumable supplies and accessories for the machines.
Demographic trends are on MAKO's side, as well. With the global population growing and more people living longer, there will be greater demand for health-care services. While Intuitive Surgical's machines currently focus mostly on prostatectomies and hysterectomies, MAKO's specialize in knee and hip repairs.
Check out this room for growth: In the U.S. alone, close to 800,000 knee replacements and more than 600,000 hip replacements were performed in 2009. Meanwhile, in 2011, 6,932 procedures were performed on MAKO machines (double the year-earlier number). MAKO is growing rapidly, and clearly has a lot of market share available to grab.
The company's financial statements show promise, too, with gross margins rising from around 37% in 2009 to more than 68% recently.
Finally, here's another growth catalyst for MAKO: new kinds of procedures. If, over time, it gets approval to perform new kinds of procedures with its existing machines or with newly developed ones, it will be able to tap new markets.
While all the above factors are very exciting, there are also reasons you might want to sell MAKO. For one thing, the company is not yet profitable. That's not to say it won't be one day, but you have many other profitable options.
You might worry about increased regulation or taxation, as well. The Patient Protection and Affordable Care Act (PPACA), for example, is levying a new 2.3% tax on the sales of medical devices in the U.S. starting in 2013.
If you find yourself bearish on the company, you're not alone. Nearly half of the stock's float has been sold short -- 48% as of the end of March. That's a lot of negativity -- though it might actually turn into a big plus for investors. If the stock keeps rising, investors who have shorted will "cover" their positions by buying shares and thereby boosting the price further, and voila -- you have a "short squeeze."
Given the reasons to buy or sell MAKO, it's not unreasonable to decide to just hold off. You might wait for it to post a series of profitable quarters. You might wait for more hospitals to buy its machines and more procedures to be performed with them. You might even wait for the company to add more kinds of procedures to its lineup.
While you wait, you might want to consider other companies in similar businesses, besides Intuitive Surgical. Relatively tiny Hansen Medical (Nasdaq: HNSN ) is applying robotic surgical equipment to catheter procedures, and has recently seen sales pick back up. Medical device company NuVasive (Nasdaq: NUVA ) specializes in spinal treatments; its revenue has also grown impressively (and consistently) over the last five years, though its earnings have turned negative recently.
For a larger, more stable, and more diversified traditional medical device companies, look at Johnson & Johnson or Stryker (NYSE: SYK ) . Johnson & Johnson sports a broad product line (including baby shampoo and Tylenol) and a solid, long-standing dividend. Stryker, maker of implants, orthopedic equipment, and more, has a lot of characteristics of the perfect stock.
I found enough for me to like about MAKO Surgical last year -- and bought a few shares. You may come to a different decision, though, which won't necessarily be a mistake. After all, there are plenty of compelling stocks out there with less uncertain futures.
And if you're looking for explosive growth but are a little queasy about the medical arena, check out our special free report, "3 Hidden Winners of the iPhone, iPad, and Android Revolution." Mobile phones are ushering in a profitable revolution just as surgical robots are.