Could a Robot Help Your Portfolio?

TK All-Star posted on 12/13/12 at 10:07 AM

Alan Brochstein Shares Four Ideas  

I must like robots! Without even trying, I have ended up with three companies on my watchlist of 100 stocks that are focused primarily on robotics. While there are some smaller robotics companies and many larger companies that focus to a limited degree on this technology, I am aware of four publicly-traded U.S. companies with market capitalization in excess of $500mm that focus primarily on robotics.

The bullish story for robotics fits into the broader theme of automation, which reduces labor costs and improves efficiency. A robot is programmed to perform tasks that a human would do otherwise. A key part of the definition revolves around being able to adapt to the physical environment. You may be familiar with Google’s investments in robotic driving. While I am not sure that this is quite ready for prime-time, there are many robotic applications that have taken off, including in the industrial, military and healthcare arenas.

The stocks I follow are quite interesting, but they haven’t had such a great year in the stock market. With this in mind, it might be worth exploring a few ideas to see if there is an opportunity to invest in robotics. Here are the three that I follow closely as well as an additional stock sorted by 5-year revenue growth:

The companies that made the list aren’t recommendations. As always, you should do your own investigation before purchasing any stock.

Note that all of these companies have no debt. I have highlighted two stocks with sharp declines in 2012. All four have rallied over the past three years, but two have been very strong while the other two have lagged the S&P 500 (mainly because of 2012). Over the past five years, all have grown sales much faster than the S&P 500. The three that are profitable have also grown earnings faster than the market as well.

Mako Surgical (MAKO) has grown the fastest over the past five years, but it is also the youngest of the companies. The company manufactures an advanced robotic tactile arm solution as well as implants used for primarily partial knee replacements but also hip resurfacing (arthroplasty). The robotics enables surgeons to perform tasks better, using patient-specific cutting instruments to cut faster. The stock has had a tough year, as new system placements were weak in the first two quarters and then procedure growth slowed in Q3. Near its lows, I ended up adding it to my Top 20 Model Portfolio during the summer. The company just issued stock, and there are concerns about a competitor that just received FDA approval. Still, I find this somewhat speculative company to be potentially rewarding and believe that some of their challenges are due to a tough market for their hospital customers rather than a negative reflection of their technology. Note that MAKO remains unprofitable at this point.

You may recall how optimistic I was two years ago regarding the prospects for Intuitive Surgical (ISRG), when I highlighted it as a ‘great company at a good price.’ It remains, in my view, the aspiration of any company in the robotics space to accomplish as much as ISRG has achieved. Its Da Vinci systems are used around the world in a variety of operations. The company has a virtual monopoly in the procedures it offers, and it is highly profitable. Patients benefit from the minimally invasive surgery, with fewer complications and quicker recovery times, both of which save the hospitals money.

iRobot (IRBT) is the only company to use the word ‘robot.’ This company has historically been focused on consumer applications with its Roomba vacuum and defense. It too is focused on healthcare, as it is developing a robot named Ava that can interact with patients. The stock has been crushed as the defense orders have evaporated, but I expect that ultimately robotics will be embraced more enthusiastically. In the meantime, the company has done a fabulous job with the Roomba and should continue to grow as it penetrates China and Brazil.

Cognex (CGNX) is the one stock not on my watchlist, though I have watched it for years unofficially. This company’s technology enables machines to see. Its ‘machine vision’ is used in factory automation, semiconductor fabrication and surface inspection. While 2012 hasn’t been great for the stock, it is near an all-time high that it set earlier this year near 45. Some fundamentals that are worth noting for your consideration: a current valuation of 21.5X 2013 projected earnings, and over $3 per share in cash.

I have shared some information on four very interesting companies, all of which have grown dramatically over the last few years. The robotics space is exciting, but it’s important to consider that the landscape can change rapidly, as many other companies are focused on the technology. To me, the technology part is obviously essential, but the real value-creation comes from applications, many of which we can only imagine today. With all of these stocks matching or lagging the market this year, some significantly, now might be a good time to explore the space more closely.

Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator

Disclosure:  Long MAKO in one or more models at Invest By Model

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Posted by TK All-Star on 12/13/12 at 10:07 AM


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