Why I'm Performing Surgery on My Watch List
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
About a month ago I added three health care stocks to the watch list of my paper trading portfolio that I call the “No Drip, No Mess” Portfolio. One of the benefits of having a watch list is to pay a bit closer attention to companies that might one day be a good portfolio fit. You get to take a bit of an unbiased look at each company and are able to process new information without being too concerned by the daily movements of the stock price. Given some new information, I’m making a change to the aforementioned watch list.
No matter how you slice it, MAKO Surgical’s (NASDAQ: MAKO) latest press release is not good. For the second time this year the company reduced guidance for sales of their RIO systems. This time they cited a problem in needing to get larger surgeon buy-ins in order for the hospitals to be able to justify the investment. It is taking them longer to get the next level of buyers to commit to sales now that they are passed the early adopter stage of their technology. While this could very well be a simple slowdown in sales that were simply pushed back into later quarters, it does throw up a huge red flag that sales growth could simply not materialize.
The second red flag relates to their balance sheet. With their stock falling another 40% it makes it less desirable to raise capital by selling shares. As they are not profitable, investors need to watch their cash burn rate. The company does have a $50 million debt funding commitment from Deerfield Management Co. to help bridge the gap to the dwindling cash on their balance sheet. While it’s certainly not a grave concern, it does make the company less desirable at the moment.
Medical device companies are filled with both promise and problems. Many investors were hoping for the second coming of Intuitive Surgical but the company is beginning to show frightening similarities to Hansen Medical (NASDAQ: HNSN). In a very good article on Fool.com, “Is MAKO Surgical the Next Hansen Medical?” the writer says, “I don't think MAKO Surgical will become the next Hansen Medical, but the fear is there. This is the second consecutive disappointing quarter in RIO system sales, but this was always a five- to 10-year story to begin with.” While I completely agree with the analysis, I (like the author) am feeling a bit more cautious on the company until I see an improvement in sales.
Finally, with the Supreme Court upholding that Affordable Care Act it must be noted that an excise take of 2.3% will be placed on medical device revenue to help pay for the expanded Medicaid coverage the law provides. As a medical device maker this could be a long-term drag on their future valuation. It also could put a damper on acquisition aspirations from companies like Stryker (NYSE: SYK) or Zimmer (NYSE: ZMH). While MAKO could provide a nice tuck-in acquisition to more vertically integrate either implant device maker, they might see the tax as a reason to further diversify their business instead of vertical integration.
Therefore, I am removing MAKO from our watch list for the foreseeable future. While I recently singled MAKO out as one of my top watch list stocks, I think it’s appropriate to take a step back here and let the dust settle for a while. I still personally own shares and plan on holding them through at least the next few quarters. However, for those virtually following the "No Drip, No Mess" Portfolio, I think it's prudent to sit this one out and I will soon be replacing MAKO with a new addition to our health watch list. Do you have a fast growing health care stock you’d like me to add to the watch list? Sound off in the comment box below.
latimerburned owns shares of Intuitive Surgical and MAKO Surgical. The Motley Fool owns shares of Intuitive Surgical, MAKO Surgical , and Zimmer Holdings. Motley Fool newsletter services recommend Intuitive Surgical, MAKO Surgical , and Stryker. 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. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.