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Author: TMFBreakerRob Big gold star, 5000 posts Old School Fool Home Fool Supernova Phoenix 1
Mission Team Member CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 18154  
Subject: Re: OT: Rob Date: 3/16/2013 10:42 AM
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I'm curious what you think of the ISRG move. I know that they're always fending off studies and commentary, but this seems a little larger than normal. Multiple credible sources are questioning the economics and the FDA incident review is piling on at the same time. -- Peter

I've got a couple thoughts:

1) High PEs *always* come down to normal levels in time. Sometimes it's gradual, sometimes it uses an excuse to drop quickly. I've attached a portion of a post I wrote regarding my "theory of PEs and high PE stocks". ;) That stuff is all down below in italics.

2) Regarding these accusations, there's a lot of different opinions over at Rule Breakers that tend to fall into this summary:

* The customer (patient) really likes the short hospital stays and minimum invasiveness of daVinci.

* Laproscopy has made huge strides in the last decade as well... and daVinci is basically laproscopy.... at higher cost. <Rob- This is not a correct view. I've listened to doctors who say that daVinci is far more articulated than any laproscopy instruments and far better.>

* ACA (aka Obamacare) will drive out high cost solutions.

* Old doctors in general are not keen on daVinci, young doctors are moving to it in the thinking that this is the future.

* The other concerns that have been expressed are, in my opinion... after reading the RB:ISRG board....largely overblown. I don't think there is any substance to fear as investors in terms of safety or effectiveness. In terms of cost-effectiveness, that's been an on-going debate for years..... and hospitals continue to buy more. daVinci's recent progress into the cardiac markets bodes well for the future, IMO.

* My opinion: You wrote "I still like the company a lot. I just don't like the idea of fighting the tape in a market that feels a little top heavy. Thoughts?" I still have my position and I think the company will continue growing for years. That being said, I personally hold a "minority opinion" (as contrasted with the outlook of most TMFs) that agrees with your comment about fighting the tape. I think there could very well be a cloud of doubt that hangs over the company for a few years as government health care develops. But, kinda like AAPL, the PE is going to go down just so far before ongoing profit increases force the price march upward to resume.

* There is a fairly good chance I will significantly reduce my position sometime this year anyway because I'll be selling off a large proportion of my portfolio to fund a franchise business I'm getting into (so much for being retired, eh? LOL). Lots of stuff has to go. As an FYI, I sold all my Ford stock earlier this week, largely to deal with expenses I've already incurred. Overall, I'm thinking 60-75% or more of my portfolio will be liquidated, as well as all the incoming money from my pension buy-out (when that comes). If it works out, it will work out very, very well. If not, I'll have to remember to save some cardboard boxes to live in. LOL I believe I can continue my current involvement at the Fool, but I've decided to reduce the number of boards I follow from 200+ to "a lot less". I will continue to be showing up on this board however. And.... I'm not really saying much else about it until we have ink on paper, which may be as soon as late next month.


*****
Show me a mature and successful company with a PE of 50, 100 or 500. You won't find it. That means that your sky-high PE will drop dramatically over time.... and that matters. - Rob

Who ARE you and what have you done with Rob? -- Dave


LOL

I also said that the PE compression is a big mountain to overcome..... and I said that I own AAPL and PCLN.

How are these reconciled?

I'm not saying that growth companies are bad or that high PEs are bad (and that, of course, brings our RAX discussions to mind). And, as vs101 says, you can get massive returns from these high PE companies.

I'm merely saying that when you buy companies like RAX.... or an ISRG or whatever..... eventually the PE will drop. And that we need to recognize that our calculation of future growth not only has to be sufficient to give us those multi-bagger returns we love..... they also have to grow enough to.... in effect.... pay down that PE from 100 down to 12 or so in some future.

We see that with ISRG now.

I used to own it when it had a PE of 65 or 70. Now, it's down to a PE of around 30. It'll drop further over time too.... you can count on it. Does that mean investing in it was a mistake? Of course not! I have a multi-bagger!

What am I saying?

ISRG earnings had to triple to give me a 3 bagger.
AND
ISRG earnings had to double again to PRESERVE that multi-bagger for me as the PE dropped in half. (That's one way of looking at it... in reality, both processes are to some degree simultaneous: multi-baggerism and PE compression).

That's the mountain that high PE investing has to overcome. Does that make high PE investing bad? In no way! It's just that we need to consider the fact that over time, our high growth companies will come down to earth.... and paying "ANYTHING" is not necessarily going to work out well (because that mountain will have to be climbed eventually).

Am I communicating or do I sound completely alien? :)

*****

Rob
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