Call me crazy, but when I analyze investments I’m usually looking for things like earnings cash flows and book value. Nowadays, most investors are simply looking for the hottest new product or concept when investing in stocks and valuation is simply an afterthought.
When looking at Intuitive Surgical (ISRG) we can see that the stock is richly valued at 43X earnings, but the company has such a strong history of meeting or exceeding analyst earnings estimates that paying such a high multiple is okay given ISRG’s fairly reliable 25% or so earnings growth rate. While I look for stocks trading at a PE ratio that is lower than the company’s growth rate, I admit that for a quality stock like ISRG paying 1.5X the growth rate is acceptable under certain circumstances. While ISRG is a high beta momentum stock, the momentum behind the company’s business fundamentals justifies the high price of the rallying stock. At 31X forward earnings and at a 25% growth rate, some growth investors would consider ISRG undervalued. Personally, I think ISRG is an okay speculative play provided investors use stop loss orders or buy put option protection to insure their portfolios against capital loss. In any event, we think investors can own ISRG provided they have an exit strategy and don’t hold the bag during market corrections like we saw last summer.
Mako Surgical (MAKO) on the other hand, looks to be overvalued