Buy, Sell, or Hold: MAKO Surgical Corp. (MAKO)

When considering any stock for your portfolio, don’t be swayed by just the positives. Examine its pros and cons, and decide whether it’s possible upside outweighs its risks. Let’s take a look at MAKO Surgical Corp. (NASDAQ:MAKO) today, and see why you might want to buy, sell, or hold it.

Founded in 2004, based in Florida, and with a recent market capitalization of $480 million, MAKO is in the business of making medical devices — specifically, RIO Surgical robotic equipment and orthopedic implants. Its main offerings involve partial-knee arthroplasties and total hip replacements.

Buy
MAKO’s business arena is one big draw, thanks in part to our world’s growing and aging population. (Our obesity problem helps as well, as obesity can accelerate knee and hip degeneration.) According to my colleague Brenton Flynn, knee and hip procedures have been growing faster than the overall population, which bodes well.

The company’s revenue has been growing steadily, but its net income has remained negative. On the plus side, though, the losses have represented a shrinking portion of revenue. And while recently reported fourth-quarter earnings disappointed many investors, they were in line with company projections and do reflect continued growth and market acceptance. In 2012, the number of RIO procedures completed rose 29% over year-earlier levels.

Another plus is quality, as the RIO systems offer below-average failure rates.

Sell
One strike against the company is that its current offerings remain a bit limited in scope, addressing just partial knee replacements, for example, and not total replacements. The company’s performance in 2012 is also not auspicious, as it underperformed sales expectations and saw its stock plunge some 49%. (The stock soared more than 60% in 2009 and 2011, and more than 30% in 2010. These numbers also point to another drawback for some: volatility. If you can’t handle wide swings, steer clear.)

The stock’s valuation doesn’t reflect a screaming buy. Due to negative earnings, there’s no P/E ratio, and the recent price-to-sales ratio of 4.5 — while below the company’s five-year average of 15.3 — is well above the S&P 500’s 1.4 and the industry’s 2.1.

Dilution is another concern, as MAKO’s share count has been inching up. That’s not necessarily a dealbreaker, as funds generated from share issuances can help further growth. But adding shares does reduce the stake in the company claimed by the earlier shares.

MAKO has powerful competition, too, or potential competition, such as from Intuitive Surgical, Inc. (NASDAQ:ISRG) , which has a market value nearly 50 times greater than MAKO and has been posting strong double-digit growth in both revenue and earnings in recent years, with more and more hospitals buying its million-dollar daVinci machines. Right now, Intuitive’s business and MAKO’s don’t really cross paths.