Money Matters - Simplified

The Best Stocks for 2011: Intuitive Surgical

 

This article is part of our "Best Stocks for 2011" series where our Foolish writers pick their top stock ideas for the year ahead. Click here to see a review of last year's picks and our 12 recommendations for the year ahead.




 Warren Buffett loves huge moats. He also likes to invest early and often, and the Oracle of Omaha buys when others are selling.

With all these investing strategies in mind, I wouldn't be surprised to see Berkshire Hathaway buying a large stake in Intuitive Surgical (Nasdaq: ISRG) right about now. It's the best investment I see at the end of the old year and the start of the new, and it fits the Buffettian template to a T.

Moat
Intuitive Surgical builds surgical robots. The da Vinci assisted-surgery system is the only platform of its kind, and it's surrounded by a massive pile of ironclad patents. The only real competition was eliminated in 2003, when the company merged with Computer Motion. Yahoo! Finance is usually pretty good at digging up rivals for comparison purposes, but Intuitive Surgical's "competitors" listing includes technology giants Toshiba and Hitachi(NYSE: HIT), neither of which makes medical equipment that's anything like the da Vinci.

This is by far the most defensible moat I've ever seen. Intuitive Surgical's entire management team could disappear or get replaced today, and the business would hardly miss a beat. Since neither of those doomsday scenarios is likely to happen, we're looking at a massive competitive advantage -- because there really is no competition to speak of.

Growth
Investing early not only makes the most out of the time value of your money, but also lets you jump aboard growth stocks before they have fully matured. And we're still very early in Intuitive Surgical's remarkable history.

As impressive as the da Vinci's presence is in North America, the company has hardly even touched the rest of the world yet. In the company's most recent quarter, about 80% of new system sales were happening inside American borders, though growth has been strong in Europe as well.

Moreover, system sales are just the beginning of the money-making opportunity. Every system in operation will need disposable instruments and accessories on a regular basis, in the tried-and-true handle and razorblade model. That creates an exponential growth curve as accessory sales will eventually outgrow system sales. In the third quarter of 2010, 37% of total sales came from renewables; that's up from 32% two years ago. You can see where that trend is heading.                                                                  

Oh, and the FDA keeps expanding the company's addressable market when it approves new procedures.

In short, we're standing in the foothills of a long and profitable climb.

Value
Finally, 2010 was a very forgettable year for this stock. If you bought in a year ago, you're drinking red ink today while the broader market has advanced. Ouch.

That's terrible news for existing shareholders, but great for new investors. Intuitive Surgical has seen sales and profits accelerate over the last four quarters, yet the stock is cheaper now. That's what we call a fire sale, people.

Granted, you might balk at a trailing P/E ratio in the 30s. However, you're paying a premium for an unmatched combination of high growth and tremendous margins. Intuitive has fatter net margins than mature medical giant Medtronic (NYSE: MDT) while growing sales faster than small cap NuVasive (Nasdaq: NUVA). You just don't see that combination very often.

What it all boils down to
If Warren Buffett thought high-tech medical systems were at all within his circle of competence, I truly believe he'd make a pass at Intuitive Surgical at this juncture. And even if he doesn't, major Berkshire holding Johnson & Johnson (NYSE: JNJ) could very well try to acquire the company. That's the kind of cash-rich Brobdingnagian it would take to have a chance of entering this company's market -- because the only way to do it is by buying the whole darn thing.

We individual investors have a very different view of Intuitive Surgical than those hapless quasicompetitors: It's the most-recommended stock in the history of our Rule Breakersnewsletter, and the second-most profitable after growth phenom Baidu.com. And Intuitive Surgical's stock has never looked cheaper than it does right now.

It's the perfect stock for 2011, in my book, and I'm backing up my words with a real-money position less than 2 months old. I mean serious business here, folks. Please take our Motley Poll then scroll down to leave a comment.

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