In 2018, instead of getting a Santa Claus rally we got a December rout. Stocks cratered into Christmas, and Intuitive Surgical (NASDAQ:ISRG) fell 20% in as many days. Luckily, its investors know the value of the company so it made a complete recovery in about the same amount of time. The dip was not specific to ISRG since the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB) stock had a similar path for the same period of time.
After the sharp recovery, Intuitive Surgical came into last night’s earnings report perfectly set up for a dip. The stock had a lot of momentum — perhaps too much. Regardless of the quality of the report, it was almost destined to fall on the news simply from the technical aspect.
First the impressive “V” recovery usually needs back-and-fill sessions before bulls can continue higher. Furthermore, ISRG stock had reached a level which had been prior failures five times before within the last 12 months. There is no shame in falling in order to reload another leg higher.
Last night management reported earnings, and investors hated what they saw. The stock fell 5% on the headline. I bet that fans of the stock will not be shy about buying the dip. It will be a matter of time. If the stock markets are higher then so will Intuitive Surgical stock.
Where ISRG Stock Stands
This is a stock I’d own for the long term. There might be short-term pain, but the trajectory is clear up and to the right. Dips in ISRG are opportunities to add or start a position in it.
So management missed on earnings expectations, but delivered double-digit growth on almost everything else. This does not make for a bad quarter. If anything it was probably a bad forecast. Even then, missing earnings is usually an easy fix. They can find the culprit line item and fix it going forward. This is not the same as saying that there is a structural problem with the company that will linger going forward.
From a price action perspective, there is benefit from having a recent sharp correction. It gives us a floor against which we can gauge new risk. In this case, a 5% after-hours dip brings it close to support levels.
From a trading perspective, $515 per share area is the point of interest for the last two months. This means that both bulls and bears agree on it, so they will fight it out. This creates congestion which on the way down translates into support. Even if that fails, there are more support levels below, all the way down to $480 per share. Long-term holders of the stock should be comfortable inside those ranges.
Intuitive surgical stock will need the help of the market in general. The macroeconomic environment is still in headline mode. We have political rhetoric and tariff headlines littering the ticker tapes. So it is entirely possible that we will revisit the February lows one more time if politicians continue their verbal combat.
But even if we do, that will also be a buying opportunity — and a better one than this recovery that is ongoing in 2019. Companies are still making a lot of money and their balance sheets are healthy. This is not 2008 and we do not have bubbles. Yes, we are close to all-time highs, but we did that on good solid fundamentals.
So far companies are reporting strong results and the mega-caps will continue their headlines next week. Except for a few questionable ones, most are likely to deliver good news. So dips will be bought, and that means that ISRG stock will find it easier to shrug any short term negativity.
Fundamentally speaking, this company has value. It sells at trailing-12-months price-earnings ratio of 51, according to Zacks. While this sounds high, it is not bloated for a company that delivers growth. For perspective, it is more expensive than Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) 25 P/E, but cheaper than, say, Chipotle (NYSE:CMG) at 63X. So although not cheap, there is not a lot of froth to shed.
Even though Wall Street’s knee-jerk reaction last night meant that they did not approve of the report, management still delivered double-digit growth on almost all metrics. So they have a solid base on which to continue building future ISRG business. There aren’t a lot of competitors in the field, and this one has established a strong foothold, making it difficult to circumvent.
I bet that they will be able to continue to successfully execute on plans for years to come. This is a stock to own now but since we have so many threats still in the news and deadlines looming through March, it’s probably best to build a position in tranches. This way I would have room to add to it in case there is another leg lower. A 5% fall after hours it’s not a deal-breaker for a stock like Intuitive Surgical.
The analysts on Wall Street agree as most of them have it as a stock to “buy,” and it is still trading below their average price target. I doubt that this report they delivered last night is ugly enough for them to change their ratings.
Click here for a bonus video on how to create income from nothing using FedEx(NYSE:FDX) stock as an example. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.