My Money Is on This Hot Medical Stock

Last summer, I pledged to put at least $4,000 of my own money behind 10 stocks. My goal was to build the World's Greatest Retirement Portfolio.

So far, the results have been outstanding. The $40,000 invested has returned $8,160, while an investment in the S&P 500 would have returned only $1,040 -- an outperformance of about 18 percentage points!

I'm here today to tell you why Intuitive Surgical (NAS: ISRG) will be a mainstay in the portfolio for a long time to come. It is the perfect combination of a company with innovation in its DNA and a competitive moat to keep the competition at bay. Read all the way to the end and I'll offer you access to a special free report on three more stocks to secure your retirement.

No Pepsi to this Coke
When I made the decision to invest in Intuitive last year, there were three key reasons for doing so: the lack of significant competition, a profitable business model, and a rock-solid balance sheet. As you'll see, all three of these facets helped the company outperform the market by more than 30% since last year.

Intuitive certainly isn't the only company out there attempting to automate surgery. Accuray (NAS: ARAY) has developed the robotic CyberKnife system that allows doctors to treat tumors, but the company is still small and doesn't compete with Intuitive's focus on prostate and hysterectomy procedures. Likewise, Medtronic (NYS: MDT) develops a full array of products, but the closest it comes to infringing upon Intuitive comes from its surgical imagery systems.

The other huge advantage Intuitive has is that its DaVinci surgical machine is rapidly becoming a tool doctors are being educated with. Adoption by health-care professionals is crucial to any medical device company's success. MAKO Surgical (NAS: MAKO) shareholders -- of which I'm one -- found this out the hard way as the number of procedures performed last quarter disappointed analysts.

It's not easy gaining wide-scale adoption, but Intuitive's ability to offer minimally invasive soft-tissue surgery has crossed that tipping point, and that's a big deal.

Keep coming back for more
Let's get one thing straight: The DaVinci robot isn't exactly cheap. Hospitals spend at least $1.7 million for each one. But that's not where the money really is for the company. At some point, the market could become saturated with the machines, though I don't think that will be anytime soon.

To ensure recurring streams of revenue, the company has adopted a razor-and-blades model. The consumable parts necessary for repeated use of the machine are much higher margin than the machines themselves are. This type of revenue has grown from 53% of all sales in 2010, to 56% in 2011, to 58% in the first quarter of 2012. As more machines get placed in hospitals, the business model is becoming more stable.

A balance-sheet rock star!
At the end of 2009, Intuitive had $555 million in cash and short-term investments on hand. Since then, that number has increased to just less than $1 billion -- all without any long-term debt. No one knows what the future will hold (recalls, product launches that fail, etc.), and that kind of financial fortitude is a great guard against unpleasant surprises.

Free cash flow has also been growing prodigiously, and while the stock surely isn't cheap, as it's trading for about 40 times earnings, you normally have to pay up for quality -- and Intuitive is worth it.

Secure your retirement
One of the reasons I undertook this venture -- to publicly call out my long-term holdings -- was to raise awareness about how important investing for the long run can be.

If you'd like three more stocks that our top analysts think deserve your money for the long haul, check out our special free report: 3 Stocks That Will Help You Retire Rich! Inside you'll get the details on three world-class companies that have the type of enduring competitive advantages that help investors compound their returns over and over again. Get your copy of the report today, absolutely free!

At the time thisarticle was published Fool contributorBrian Stoffelowns shares of MAKO Surgical, Intuitive Surgical, and Coca-Cola. You can follow him on Twitter, where he goes byTMFStoffel. The Motley Fool owns shares of Intuitive Surgical, PepsiCo, MAKO Surgical, and Coca-Cola.Motley Fool newsletter serviceshave recommended buying shares of Intuitive Surgical, PepsiCo, Coca-Cola, and MAKO Surgical, and creating a diagonal call position in PepsiCo. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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