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Hedge Funds Misdiagnosed This Hot Stock

Thursday, 26 Aug 2010 | 9:25 PM ET

Intuitive Surgical, the I in Cramer’s high-growth C.A.N.D.I.E.S. group of stocks, isn’t living up to his expectations. Since creating the group on June 3, ISRG is down 19%.

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What’s behind the underperformance? Well, first of all, Medtronic’s disappointing quarter has put pressure on medical-device companies across the board, and a New England Journal of Medicine article citied Intuitive Surgical’s Da Vinci surgical machine as an example of rising health-care costs. While the machine allows for minimally invasive procedures, helping to get patients out of the hospital faster, it sells for $1.5 million a pop.

More detrimental to the share price, though, has been the massive institutional selling in ISRG. According to Cramer fave technical analyst Ken Shreve, who correctly predicted the similar losses in Seagate and Garmin back in February, this stock has topped out, and the big money is exiting in a big way. Shreve said that the only way to reverse the trend would be for institutional investors, i.e., hedge funds, to pile back in, but that appears unlikely to happen. He thinks ISRG drops to $240 before it bottoms.

Cramer won’t deny that the hedge funds are dumping this stock, but he maintained on Thursday it was just the stock that was broken and not the company itself. On Wednesday, Wells Fargo upgraded Intuitive Surgical, saying it still has plenty of room to grow. Hospitals are still buying the Da Vinci, as evidenced in the most recent quarter where sales were up 42% from the previous year. And while the Da Vinci’s use for prostate surgery is at about 80% market saturation, IRSG can still expand its footprint in hysterectomies, nephrectomies, myomectomies and various colorectal surgeries.

ISRG, trading at just 22 times 2011 earnings when you back out the $39 a share in cash, with a 24% long-term growth rate, is cheap. Cramer credits the avalanche of selling that came from those institutions for that discount, but he thinks the stock can make its way back. That’s why he thinks investors should buy more on the way down.

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