September 2, 2012 in City

Intuitive Surgical balances risk with potential long-term reward

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Consider Intuitive Surgical (Nasdaq: ISRG) for your portfolio. It carries more risk than many companies, but it offers more potential reward as well. The company is the biggest player in the robotic surgical equipment arena, selling hospitals its “da Vinci” machines that permit surgeons to perform procedures in less invasive ways.

In the company’s last quarter, revenue was up 26 percent over year-ago levels and earnings grew by 32 percent. The company has no debt and generates solid cash flow. Better still, the company doesn’t make money only by selling its million-dollar machines – a little more than half its revenue is recurring, from service contracts and supplies and accessories for the machines.

Then there are procedures. Most of the procedures its machines perform are hysterectomies and prostatectomies, but the company is working to get approval for new procedures. If and when it succeeds, significant new revenue streams will open up. International sales represent another avenue to growth.

Intuitive Surgical seems like a promising long-term investment. Learn more before you jump in, or perhaps just add it to your watch list and hope for a lower price. Its stock price, recently near $500 per share, may not be a screaming bargain, but it doesn’t seem severely overvalued, either.

(The Motley Fool owns shares of it and its newsletters have recommended the stock, too.)

Ask the Fool

Q: What are “naked calls”? – L.P., Honolulu

A: They’re a way to invest using options. There are two main kinds of options: calls and puts. Owning a call gives you the right to buy a set number of shares, at a set “strike” price, within a certain period of time (often just a few months). You pay for this right. Puts give you the right to sell shares.

You sell (or “write”) naked calls when you don’t own the underlying stock. It’s risky because if the stock soars, you may have to buy it at the new, high price to deliver it to whoever bought the call you sold. You can potentially lose a lot. Of course, if the stock doesn’t pass the strike price before the option expires, you pocket the price of the option. That’s why people write naked calls.

With the much more conservative covered-calls strategy, you sell a call only when you own the underlying stock and are willing to part with it, if need be. You don’t lose money this way. If the stock soars and someone exercises the option you sold him, you don’t have to buy the shares at the new, high price – you already own them and can hand them over, still having pocketed the price of the option. Of course, you may end up wishing you still owned the stock.

My dumbest investment

I started following Netflix when I noticed how poorly it was managing itself. When the stock fell nearly 20 percent in a single day, to about $170, I bought. I thought the market was being harsh and it would surely bounce back. I learned that greed is not the best strategy for me to pursue. – S.K., Tampa, Fla.

The Fool responds: Netflix shares topped $300 a little over a year ago. But then the company announced price hikes, followed by a decision to split into two companies, Netflix for the growing streaming business, and “Qwikster” for the DVD-by-mail business. The split has since been abandoned, but the stock fell hard and was recently near $60.

Pessimists worry about its competition and the significant expense of building its library, while optimists like its rising subscriber rolls, its dominance in streaming video and its commitment to reinvesting in itself. They’re hopeful about its growth prospects abroad, as well. The curtain hasn’t come down yet for this company, but it’s not for the fainthearted. (The Motley Fool owns shares of Netflix and our newsletters have recommended it.)


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