Editor's Choice

10 Stocks for 2013: #1 Intuitive Surgical

Dave is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It's time again to look ahead to the next year.  We put together a 10 Stock list for 2012 at Fastball Financial and achieved so-so results (a gain for that group of stocks, but they still did not outperform the S&P 500 as a whole...we'll put out a separate review on that soon).  Looking ahead to 2013, we see a continued strengthening in the economy, assuming that Congress can handle the upcoming issues of the debt ceiling and sequestration (that deadline was really only pushed back to March 1, 2013).  Our list for 2013 leans heavily on the consumer with multiple picks in consumer-related names (retail and restaurants), but still includes diversification across other industries (healthcare, insurance, technology, banking / financial, etc.).

The goal of the 10 Stocks for 2013 is to provide you with a portfolio of ten great stocks for:

  1. Diversification across industries and market caps
  2. Growth in some of the hottest themes and industries
  3. Sufficient stability and dividends to offset potential market losses

Additionally, for each stock we will provide you with at least one alternative stock in a similar industry in case you want more than 10 stocks in your portfolio.

#1 - Grouping = Healthcare; Company = Intuitive Surgical

We'll kick-off the 2013 list with a name very familiar to our Fastball Financial subscribers: Intuitive Surgical (NASDAQ: ISRG).  It was a big winner for us in 2011 and held-up well again for us in 2012.  We've been fans of ISRG for a long-time.  It was our first recommendation when we started Fastball Financial back in June of 2011.  It was $340.60 at that time.  It ended 2012 at $490.37. 

Intuitive Surgical makes da Vinci surgical systems.  These systems take a surgeon's movements and translate them into micro-movements within the patient.  This allows for much less invasive and much more precise procedures.  Intuitive Surgical makes money off both the initial sale of da Vinci systems and the recurring sales of instruments and accessories.

The stock has a P/E of 33, but has consistently traded for around 1X its growth rate, all while its cash flows from operations continue to rise.  As you can see from the chart below, ISRG has been a fantastic buy on dips.

<img src="http://media.ycharts.com/charts/4755951e570184586a9dc4e9ef0a294e.png" />

Sales of da Vinci systems continue to be strong, thereby also increasing the recurring sales from instruments and accessories.  The number of hospitals that have this technology is still relatively low on a global scale.  As the da Vinci system continues to show improved results and recovery times, hospitals won't likely be able to not invest such technology in the future.

With excellent margins, a solid track record of strong growth, and a still low market penetration, Intuitive Surgical should remain a winner in 2013.

Alternate: Universal American

We're bringing back another name from our 10 Stocks for 2012 to hopefully help us out in 2013: Universal American (NYSE: UAM).  This company provides health insurance, primarily Medicare Advantage, but is also building capacity with Medicaid to handle the dual eligible population.  In simple terms, dual-eligible refers to somebody that is eligible for both Medicare and Medicaid.  The current issue is that these folks tend to be extremely expensive, mostly because different benefits are handled by different systems and there really is no coordination of care.  Medicare (federal program) pays for certain expenses and Medicaid (state program) pays for others.  So the two programs are only focused on their particular costs.  The rules are changing going forward and insurance companies, such as a Universal American, could get funding from both programs, manage the care effectively, and make a handsome profit.  In the end, it's a win-win-win.  Universal American makes money.  The government programs don't have to raise reimbursement rates as much in the future.  And most importantly, the member is generally healthier.

Unfortunately, Universal American was one of the stinkers on our 2012 list.  The stock did nothing but fall all year long.

<img src="http://media.ycharts.com/charts/3e83968a50fa7f2b2c6895be3fe53780.png" />

However, this decline is providing an even better opportunity since they have a P/E of 13 and a price to book value of 0.67.  The market is essentially discounting any potential future business that Universal American will generate.  It also remains an excellent buy-out candidate, which would provide an instant pop to any portfolio.  Bottom line: it's been a rough year for Universal American, but the valuation shows that much if not all of the bad news is already priced in.

Other Possibilities: United Healthcare and Abbott Laboratories

If you're looking for something steadier, let's look at two companies with big market caps and big dividends.  United Healthcare (NYSE: UNH) is the giant nationwide healthcare insurance company, with a market cap of $55 billion.  It had a so-so 2012, generating a couple percent stock price increase and a couple percent dividend payout.  Nothing spectacular, but it was steady.  It's P/E is only 10, so United Healthcare is very inexpensive.  Combine that with a 1.6% dividend yield and you have a nice, stable company with some downside protection against any potential risks.

Abbott Laboratories used to offer a combination of pharmaceutical products and diagnostics systems.  It has a market cap of over $100 billion and provides a high dividend yield.  Interestingly, Abbott Laboratories is splitting into two companies in 2013.  Abbott Laboratories will continue to operate the medical products, while Abbvie will be a new company operating the pharmaceuticals division.  The plan is to unlock value by creating a high-growth company in Abbott Labs, and a steadier, low-growth dividend payer in Abbvie.  Therefore, if you're looking for growth, you can stick with Abbott Labs (NYSE: ABT).  But if you just want a steady company with a high-dividend, then Abbvie (NYSE: ABBV) is the place for you.

Bottom Line

All good portfolios should include healthcare stocks, at least one.  They are relatively resistant to economic downturns and can provide growth and dividends for patient investors.  My preference is to go with the growth in Intuitive Surgical.  Even during the recession, Intuitive Surgical continued to grow and its stock eventually provided tremendous price appreciation to those who were willing to wait through the recession price drops.  If you need something more stable, there are plenty of other options, including some that provide nice dividends, such as United Healthcare and Abbvie.

Thanks for reading.  Stocks #2 - 10 in our 10 Stock Portfolio for 2013 will follow soon.

Zaegs owns shares in Universal American. The Motley Fool owns shares of Intuitive Surgical. Motley Fool newsletter services recommend Intuitive Surgical and UnitedHealth Group. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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