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TheDumbMoney (59.58)

Intuitive Surgical, My Strongest Performer, Richly Valued

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April 19, 2012 – Comments (5) | RELATED TICKERS: ISRG

In summer 2010 I read me some Philip Fisher and realized I needed to get away from pure "value" investing.  My first purchase was ISRG, which I first bought around $286/share, and added to in December of that year at $255/share.  I then added in July 2011 at $365ish/share, also following a Philip Fisher rule, which I paraphrase as, "don't be afraid to add money just because a stock has gone up, if you still think it has great growth prospects.

(As stated many times, all of my CAPS picks are real money picks, I note new purchases in the comments under each pick, when I sell out entirely I remove the CAPS pick.  My CAPS picks are the only stocks I own, and every stock I own is noted in CAPS.)

I still think ISRG has great prospects.  But in the wake of this quarter's nice earnings report, and the huge pop this stock has had over the past few months, I re-ran my discounted free cash flow analysis and thought a bit more about it.

You can find my post on my blog here.  You can find my discounted cash flow spreadsheet in Google docs here. 

Basically, to think you are paying fair value, you need to assume ISRG can grow FCF at a 21.5% clip or likely better for ten years.  To think you are getting it at a 20% discount to fair value, you need to believe ISRG can grow FCF at a 25% clip for ten years.  Yowzers.  I'm not selling, I think it's very possible ISRG can do this.  But I think this thing has been in the hands of momentum traders all Spring, and I think a pull-back is likely. 

Focus on risk, not return.  The risk of a large pullback is higher than the likelihood of a major gain from here, in my view, at least within the next year. 

5 Comments – Post Your Own

#1) On April 19, 2012 at 8:21 PM, TheDumbMoney (59.58) wrote:

To explain my last two paragraphs:  I'm not trading or thinking on technicals.  I just think that at this valuation, the short term return probability is outweighed by the chance of a pull-back, particularly since I don't think demand for the shares is being driven entirely by people who have a long-term point of view. 

Nonetheless, I think it's very possible this thing busts through $600/share.  I just don't think that level will be compatible with sustainable returns before some mood intervenes and takes the shares down to a lower level in the meantime.   

Mainly, I just think ISRG has reached the outer limits of what even those, like myself, who are bullish on growth, can deem remotely related to fair value.  As it grows, ISRG keeps REPRICING itself for a continued ten years of 20-25% growth.  That was what it was priced for two year ago.  That is what it is priced for now.  For a certain amount of time that can continue.  But eventually the "ten years of 20-25%" growth story breaks down from a fundamental perspective.  And when it does, you do not want to be in the last group of investors who assumed it could continue growing 20-25% for ten years.  You don't even want to be in the second-to-last group.  That's how you end up buying Microsoft stock in 1999.

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#2) On April 19, 2012 at 11:38 PM, Valyooo (99.82) wrote:

So why don't you sell half

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#3) On April 20, 2012 at 10:38 AM, Valyooo (99.82) wrote:

And use it to buy some other stocks you think are particularly cheap

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#4) On April 20, 2012 at 10:52 AM, TheDumbMoney (59.58) wrote:

I might do so.  I'm going to continue evaluating my present holdings, and looking at others.  I generally don't sell until I have a strong conviction about where to put the money though.

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#5) On April 20, 2012 at 11:36 AM, Valyooo (99.82) wrote:

Right, that's definitely a good idea. But the market seems to finally be valuing stocks individually instead of in tandem, so I am sure you can find value somewhere...my vote would be std, but obviously I have been wrong on that one so far.

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