Election Cycle + Valeant Collapse = Healthcare Opportunities

If you look around the U.S. market these days you are likely to find the most value from a quantitative perspective in the energy and healthcare sectors. The former area is tricky because the underlying commodity price is so crucial to the profitability of many industry participants. Pipeline owners and large integrated energy plays depend less on the actual commodity price, but because of that you will likely find less value in safer subsets of the industry.

Within the healthcare space, we are seeing a familiar pattern come to the forefront again during the current election cycle. During the 2008 campaign the sector was in focus and saw unjustifiable selling. Back then it was largely centered on the private insurance industry, and this time around bad apples like Valeant have shined a light on drug company practices that sometimes tow a shady line.

Despite many that claim the markets are efficient, history shows us that just because markets go through periods where they shun certain companies, assuming the worst by painting every player with the same brush can be shortsighted. I recall back in 2008 when the health insurance stocks were crushed on fears of what government involvement under President Obama might look like. Many simply assumed that for-profit entities would suffer, without even thinking through what the political goals were and how that would play out in Corporate America.

To address whether the market "always gets it right" during the heat of the battle, let's briefly revisit the 2008 healthcare scare. The thrust of Obamacare was that Americans would be required to purchase insurance and that said insurance would have a federally mandated minimum level of benefit (no lifetime benefit caps, no exclusions for pre-existing conditions, etc).  For a long time investors were so focused on the government getting involved that they missed the big picture. The law required that Americans buy a private health insurance plan. Only on Wall Street would the resulting market reaction be to conclude that this would be a bad development for companies selling those very insurance plans.

Quite logically, the health insurance stocks have been some of the biggest winners during President Obama's seven-plus years in office. For instance, the iShares U.S. Healthcare Providers (IHF) exchange-traded fund, whose top holdings include all of the largest health insurance companies, has more than doubled in price since January 2008.

Fast forward to current day and we once again have an assault on the healthcare sector, but this time the selling is focused on pharmaceutical companies and their drug pricing, reimbursement, and distribution policies. Unlike the energy sector, there is not a large outside factor beyond the control of company executives that will determine the fate of their financial results. Sure, bone-headed management decisions like those made at Valeant under CEO Michael Pearson will get you in trouble, but that is true for any company in any industry. The idea that every drug company in the country acts just as Valeant has in recent years is ludicrous.

Sure, the ripple effects will be felt across the sector, but the idea that the business model of selling drugs is broken is silly. The U.S. demographic trends only point to more demand in the future. And with more Americans being covered by insurance, there will be plenty of dollars to be spent on treating an aging population.

So where should investors look for bargains? Below are four names that my firm owns in various quantities. If you strip out the noise and focus on underlying cash flow, I think there are plenty of attractively priced drug companies out there. And a year from now when the election cycle is over and the Valeant situation has been rectified one way or the other (bankruptcy or slow recovery back to health), I suspect market participants will get back to basics.

*Allergan (AGN) $225

*Horizon Pharma (HZNP) $16

*Perrigo (PRGO) $100

*Shire (SHPG) $183

All four of these companies look like Valeant in that they have engaged in a lot of M&A activity. In the case of Allergan, they also competed with Valeant for some of those deals. Horizon is smaller company that has grown by acquisition. Two were targeted by larger firms but had deals fall through (Pfizer walked away from a deal to buy Allergan, AbbVie did the same with Shire). Perrigo today announced that its CEO is leaving to replace Pearson at Valeant, after rebuffing a buyout offer from Mylan for $205 per share. Shire quickly pivoted after its failed AbbVie tie-up and agreed to buy Baxalta.

You can see why these stocks are down anywhere from 33% to 60% from their highs. Lots of noisy news flow over the last year. But if you strip all of that out you are left with strong companies with lots of free cash flow generation ability.

Lastly, I think it is important to note that the idea that growing through M&A in the drug sector is a red flag should be reevaluated. Just because Valeant borrowed more than $30 billion and systematically overpaid for acquisitions does not mean that any drug company that acquires other companies is a suspect investment. Consider that the single best launch of a new drug ever was Gilead's Sovaldi ($10 billion in sales its first year), which was acquired via the acquisition of Pharmasset in 2012. Before that, one of the best-selling drugs of all-time was Pfizer's Lipitor, which peaked at over $13 billion in annual sales. Lipitor was developed by Warner Lambert, a competitor Pfizer acquired 15 years ago. As with any acquisition, it all comes down to what you get and how much you pay. The idea that investors should shun drug companies that have a history of M&A, without looking any deeper, is strongly misguided.

Full Disclosure: Long shares of Allergan, Horizon, Perrigo, and Shire at the time of writing, but positions may change at any time

Even Great Investors Like Bruce Berkowitz Make Mistakes

I know, I know, the headline above is not earth-shattering news. Every quarter dozens of the world's best investors disclose their holdings to the world via SEC filings (granted, the data is about 45 days outdated, but it still gets lots of attention). It's easy for individual investors to follow well-known money managers into certain stocks, figuring that they can piggyback on their best ideas. I can certainly find far worse investment strategies for people to implement, but it is still important to understand that even the best investors make mistakes. And there is nothing stopping the stocks you follow certain people into from being one of the mistakes rather than one of the home runs.

I think this topic fits right in with my previous post on Sears. Not only is Eddie Lampert the company's CEO and largest shareholder, but he is one of the best hedge fund managers of the last 25 years. It is perfectly reasonable to assume that a billionaire in his position would be primed to create tons of value for investors. And yet, since Lampert orchestrated the merger of Kmart and Sears, which formed Sears Holdings in 2005, the stock price has dropped from $101 the day the deal was announced to $40 a decade later. Adjusted for dividends and spin-offs received over that time, Sears stock has fallen by about 40%, while the S&P 500 index has risen by about 80% during the same period. Eddie Lampert's ownership and involvement alone has meant little for investors' portfolios. Simply put, Sears Holdings has been one of his mistakes.

Interestingly, many of the company's steadfast bulls point to the fact that another very smart and successful investor, Bruce Berkowitz of Fairholme Capital Management, owns 23% of Sears Holdings. That's right, Lampert and Berkowitz own or control 70% of the company. Berkowitz isn't new to the Sears investor pool either; he started buying the stock in 2005 just months after Sears Holdings was created. How can both of these guys have been so wrong about Sears for so long? It's not a tricky question. Neither of them is perfect and they have made (and will continue to make) mistakes. It really is that simple. Since I have written about Eddie Lampert many times since this blog was launched ten years ago, I think it would be interesting to try and figure out why Bruce Berkowitz has been on the losing end of Sears.

Berkowitz's background is in analyzing financial services companies, which is why you will often find most of his capital allocated to banks and insurance companies. Those industries are his bread and butter. In fact, Berkowitz's flagship Fairholme Fund had more than 80% of its assets invested in just four companies as of February 28, 2014: AIG, Bank of America, Fannie Mae, and Freddie Mac. If that doesn't signal his preponderance for financial services companies, I don't know what would.

Now, Berkowitz has not been shy about why he invested in Sears Holdings; he thinks there is a ton of hidden value in its vast real estate portfolio. Unfortunately, his trading record in Sears (he first bought the stock during the third quarter of 2005 at prices well over $100 per share) shows that real estate might not be one of his areas of expertise. Warren Buffett has popularized the term "circle of competence" and tries very much to only invest in companies he understands very well. That's why up until recently (his 2011-2013 purchases of IBM shares bucked the trend) Buffett has avoided technology stocks.

I would postulate that real estate investments do not fit squarely into Bruce Berkowitz's circle of competence. As you will see below, his trading record in Sears underscores this, but we have also seen it with his massive and long-standing investment in St Joe (JOE), a Florida real estate developer.

Below is a quarterly summary of Fairholme Capital Management's historical trading in Sears stock (I compiled the data via SEC filings). Of the 24.5 million shares Fairholme currently owns, more than 55% (13.6 million) were purchased over a 15-month period between July 2007 and September 2008, at prices averaging about $110 per share. More troubling is that this was when real estate prices in the U.S. were quite bubbly, coming off a string of record increases (most local markets peaked in 2006 and 2007) and Berkowitz was largely investing in the company for the real estate. The timing was quite poor. All in all, if we assume that Fairholme paid the average price each quarter for Sears, the firm's cost basis is about $85 per share (before accounting for spin-offs).

St Joe (JOE) has also turned out to be one of his relatively few mistakes. It could certainly be merely coincidence that both the Sears and St Joe investments were made based on perceived (but yet-to-be-realized) real estate value, but I'm not so sure. Like with Sears, Fairholme Capital Management has a very large stake in St Joe. In fact, Fairholme is the largest shareholder (owning about 27% of the company) and Bruce Berkowitz is Chairman of the Board (sound familiar?). Berkowitz started buying St Joe during the fourth quarter of 2007, around the same time he was massively increasing his investment in Sears. His largest quarterly purchase was during the first quarter of 2008 (talk about bad timing), when he purchased more than 9.2 million shares (37% of his current investment).

St Joe's average trading price during that quarter was about $38 per share, but subsequent purchases have been at lower prices, so the losses here are not as severe as with Sears. By my calculations (see chart below), Fairholme's average cost is around $28 per share, versus the current price of about $20 each. But again, not only has the investment lost about 30% of its value, but the S&P 500 has soared during that time, so the gap in performance is so wide that it would take a small miracle for either of these investments to outpace the S&P 500 index over the entire holding period, as the returns needed to make up for 7-10 years of severe losses during a rising stock market are significant.

Now, the purpose of these posts is not to point out the few big mistakes two very smart investors have made over the last decade, while failing to mention their big winners. Any of my readers can look at the history of the Fairholme Fund or ESL Partners (Eddie Lampert's hedge fund) and see that they both have posted fabulous returns over many years. The point is simply to show that sometimes these investors make mistakes, even with companies where they own and/or control a huge amount of the stock. Just because Eddie Lampert and Bruce Berkowitz are involved in a major way (either in ownership, operationally, or both), it does not ensure that the investment will work out great for those who eagerly follow them. Just because they are smart investors does not mean these are "can't miss" situations. There are plenty of people who are sticking with Sears because of Eddie, or sticking with St Joe because of Bruce. That alone, however, is not necessarily a good reason to invest in something.

I will leave you with one more example of Bruce Berkowitz making a large bet on a stock outside of his core financial services wheelhouse. At the end of the third quarter of 2008 Fairholme Capital Management owned a stunning 93 million shares of pharmaceutical giant Pfizer (PFE). It was an enormous position for him and was featured in many investment magazines. This single $1.73 billion investment represented as much as 24% of end-of-quarter total assets under management for Fairholme, and all of those shares were purchased over a 26-week period in 2008 (more than 3.5 million shares purchased, on average, every week for six months).

Now, given how large of a bet this was, even by Bruce Berkowitz standards, it would have been easy to assume that this investment would be a home run. But as you can see from the trading data above, Fairholme lost money on Pfizer after holding the stock for only about 18 months. During the fourth quarter of 2009 alone, the firm sold more than 73.4 million shares of Pfizer (after having purchased 73.7 million shares during the second quarter of 2008). Perhaps pharmaceuticals aren't Bruce Berkowitz's bread and butter either. Fortunately for him and his investors, however, his prowess picking banks and insurance companies has helped him compile an excellent track record since he founded his firm in 1997.

Full Disclosure: No position in St Joe or Pfizer at the time of writing, but positions may change at any time.

Part Time Workers, Consumer Spending, And The Affordable Care Act

Don't worry, no political arguments will be made here. That is not worth the effort for the author or the readers of this blog. However, since we are focused on stock picking as investors, it is a valuable exercise to dig into the data and determine if there will be a material impact on U.S. corporate profits because of the Affordable Care Act. After all, if consumers' pockets are squeezed from fewer hours worked each week and/or the need to start buying health insurance for the first time, that would definitely impact the sales and earnings of the companies we are invested in. And that could hurt our portfolios.

Since the September jobs report came out this week I decided to take a look and see if the trend than many people fear as a result of the new healthcare law -- employers shifting full-time workers to part-time status in order to be exempt from being required to provide them with health insurance -- has actually started to take hold. Many people have already argued one way or the other, but most of them have political motivations and rely on a small subset of anecdotal reporting without actually looking at the numbers and reporting the truth.

The good news for our investment portfolio is that this trend has yet to materialize. It certainly could in the future, so we should continue to monitor the situation, but so far so good. Last month there were 27, 335,000 part-time workers, out of a total employed pool of 144,303,000. That comes out to 18.6% of all employed people working part-time (defined as less than 35 hours per week). That compares with 26,893,000 part-time employees during the same month last year, which equated to 19.1% of the 142,974,000 employed persons. Interestingly, part-time workers are actually going down in both absolute terms and relative to full-time workers. These numbers will fluctuate month-to-month, but it clearly has not happened as of yet.

The other potential problem with the Affordable Care Act, and more specifically the requirement that everyone buy health insurance, is that discretionary consumer spending could fall as more of one's after-tax income goes towards insurance and is not spent on discretionary items. We should remember of course that consumer spending counts the same in the GDP calculation regardless of whether or not we buy insurance or other things, so there is no overall economic impact. But, we should expect to see consumers allocate their funds differently, which could impact specific areas of the economy (vacationing, for instance).

But just how much of an impact will this have? Will it be large enough to materially hurt the earnings of many public companies? To gauge the overall potential for that we need to dig into more numbers.

About 15% of the U.S. population does not have health insurance. Let's assume 100% compliance with the Affordable Care Act (either via the purchase of insurance or the payment of the penalty for not doing so). Let's further assume that the net negative financial impact of such compliance comes to 5% of one's income (not an unfair assumption based on insurance premiums). That means that approximately 0.75% of consumer spending (5% x 15%) would be reallocated to healthcare and away from other areas. While that is not a big shift, it would be real.

However, the analysis can't end there. We can't simply conclude that approximately 1% of non-healthcare consumer spending will be lost due to the new law. Why not? Because that would assume that every American earns the same income. In reality, those impacted by the Affordable Care Act (the uninsured), are skewed towards lower and middle income folks. Most wealthier people get health insurance through their full-time jobs and will continue to do so.

Now, the bottom 50% of Americans only make 15% of the income earned nationwide. If we factor that point into the equation, then the overall impact on consumer spending goes from quite small (0.75% per year) to fairly immaterial. In fact, it comes out to something around 0.2% of overall consumer spending per year if we assume that the average uninsured person falls into the 25th percentile of total income.

So what is my conclusion from all of this? Well, I own a lot of shares in consumer-related companies both personally and for my clients, and I am not concerned about the Affordable Care Act taking a meaningful bite out of the profits that those companies are going to generate in the future.

Investors in Sarepta Therapeutics Should Think About Selling Some

Today's big stock market winner is Sarepta Therapeutics (SRPT), a small biotech company developing Eteplirsen, a novel therapy for Duchenne Muscular Dystrophy. Shares are rocketing higher by a stunning 175% today, from $15 to $41 each, on news that a phase 2 study showed promising results compared with placebo.

There are some red flags though, that should be pointed out. The study was completed on just 12 patients, normally not a large enough sample to get FDA approval. And 4 of those were the placebo group, so only 8 subjects received the drug for the full 48 week trial period. Second, the particular genetic mutation this drug targets is only present in 13% of cases, so the potential patient pool here is only about 2,000 people in the United States.

At a price of $400,000 per year (a typical level for orphan drugs that treat small patient populations), U.S. sales could reach $800 million if the drug is approved and every patient takes it. There are a lot of "ifs" in this scenario, however, and after today's huge stock price jump, Sarepta is being valued at nearly $1 billion already. FDA approval, even if it comes, it not right around the corner.

Long investors would be wise to consider taking some of their gains off of the table. Small cap biotech stocks like this are quite risky, especially after having nearly tripled in a single day. Situations like this can easily go either way longer term.

Full Disclosure: No position in SRPT at the time of writing, but positions may change at any time

If Conservatives Succeed in Phasing Out Medicare, HMO Bull Market Will Continue Unabated

Contrary to what opponents of the Obama Administration's healthcare reform law argued originally (that the "government takeover" of healthcare would drive private insurance companies out of business), HMO stocks have been on fire over the last two years, as this chart of the Morgan Stanley Healthcare Payor index shows:

The reason, of course, is that the new law was about as far from a "government takeover" as one could get. Instead, Americans are being required to buy insurance from the private sector, which not surprisingly, is a huge boon to the HMO companies (hence the stocks are soaring).

With healthcare costs rising far faster than inflation, and the long term costs of Medicare serving as the single biggest problem for our federal government's long term budget issues, Republicans led by Rep. Paul Ryan are unveiling a new budget proposal. At the heart of the plan is a phase-out of Medicare for Americans who today are under the age of 55. In its place, the government would subsidize the cost of private insurance plans that retirees would purchase on their own. Think of it as the same employer-based system you have now at work, except that the government would pay some of the cost of the plan after you retire, and you would be responsible for the rest.

This concept is sure to face a ton of backlash, as it shifts the burden of surging healthcare costs from the government directly into the pockets of the middle class America. However, imagine how great it would be for the insurance industry and the HMO stocks. Not only would the HMO companies operate in an environment where people were required to buy a plan from them, but all of the country's retirees would become their customers, whereas today they don't sell plans to any retirees who qualify for Medicare.

This is surely a development to watch, not only from the standpoint of future retirement planning, but also in terms of how you analyze potential healthcare investments in the future. The U.S. healthcare system is already run based on how much profit can be generated (not how to give the best care for the lowest price) and this new plan would transfer even more wealth from the pockets of Americans to the coffers of the insurance industry. Not good for us, but great for the HMO stocks!

Forbes Investor Team Recommends Genentech Stock, Even Though It Stopped Trading 16 Months Ago

File this away as the most amusing item of the day. I always get a kick out of some of the investment articles I see on various finance-related web sites. Now, I am sure I have made a few mistakes over the years on this blog, but never anything like what the Forbes Investor Team posted on their site today. In a piece written by John Reese of Validea Capital Management, there are four stock recommendations, including Genentech. Here is what John says about the company:

The South San Francisco-based biotech firm ($100 billion market cap) has averaged a 22.1% ROE over the past three years, has increased EPS in six straight years, and has almost three times as much net current assets as long-term debt. It isn't cheap, selling for almost 30 times trailing 12-month earnings, but my Lynch-based model thinks it's worth it, given its 41.6% long-term growth rate. (I use an average of the three-, four-, and five-year EPS growth rates to determine a long-term rate.) Another reason the strategy is high on Genentech: the firm's conservative financing. It has a debt/equity ratio of less than 20%.

Of course, this is amusing because Genentech was acquired by Roche more than a year ago, in March 2009, and the stock has not traded since. I have to question this manager's "Peter Lynch-based model" given that it flashes buy signals on stocks that do not even exist anymore. Hilarious.

Despite Better Growth Prospects, Investors Are Shunning Biotechnology and Big Pharma Firms Alike

It was not too long ago that leading biotechnology companies fetched premium multiples to their large-cap pharmaceutical competitors. As the large well known pharma companies face many patent expirations in coming years, smaller and more growth-oriented biotech firms commanded both higher valuations and more favorable outlooks among investors. However, for some reason in recent months we have seen biotech stocks give up much of that premium. For the first time I can recall, many biotechs trade for below-market prices, in-line with slower growth pharmaceutical counterparts.

Here is a summary of some leading large cap stocks in both the biotechnology and pharmaceutical areas. You can see that the P/E ratios are very similar but the projected growth rates are meaningfully higher for the biotech sector, by a factor of nearly 5x. The only conclusion I can make from this is that biotech stocks continue to deserve higher relative valuations, but for some reason Wall Street has lost sight of this recently.

Trading in Dendreon Stock Shows Why Short Term Trading Is Such A Gamble

You may have heard about Dendreon (DNDN), a small money losing biotechnology company that is in the process of getting its cancer vaccine, Provenge, approved by the FDA. Full results from a crucial phase three study were released yesterday afternoon in Chicago, but about half an hour prior to their release, shares of Dendreon fell off a cliff for a couple of minutes and trading was halted for "news pending." Between 1:25pm and 1:27pm ET Dendreon stock fell from above $24 to as low as $7.50, and were halted at $11.81 per share.

Immediately investors were baffled. The most plausible explanation was that the full study results somehow were leaked early, someone learned they were bad and sold their stock, which in turn caused others to panic and sell too. That would have been an odd turn of events, however, because the company had indicated recently that the study results were clearly favorable.

When the news was finally released to the public there were no surprises, which makes those trades just before 1:30pm very strange. The NASDAQ exchange quickly investigated the trades to see if any were made erroneously, but they found nothing wrong and the trades will stand. Today the stock reopened and is currently fetching about $24 per share.

This story only serves to further my personal belief that short term trading in the stock market is so speculative that it is really nothing more than gambling. Evidently somebody somewhere thought they saw or heard something that was negative for Dendreon, others followed suit and sold their shares like lemmings jumping off a cliff, but in reality there was no news at all.

Undoubtedly some investors quickly hit the sell button during those few short minutes yesterday afternoon, fearing that if they didn't their stock would fall even further (Dendreon stock sold for $2 in March, so many people had huge gains). They lost between 50% and 75% of their money for no reason. Other investors surely had large paper gains in Dendreon and had stop loss orders in place to limit any future losses. Many of those stops were triggered as the stock collapsed from $24 to $7 and rebounded to $12 and those investors also lost big time.

As you can see the market is very complex and sometimes things happen that are not rational and should never have happened. Speculating on near term movements of stocks (especially small biotech companies) is a very risky endeavor. All the market needs is a willing buyer and a willing seller to agree on a price in one split second. Reality need not apply in such a case, but millions of dollars can be lost in a matter of minutes, as was the case with Dendreon yesterday.

Traders beware. In some cases Wall Street can look very much like a casino.

Full Disclosure: No position in Dendreon at the time of writing, but positions may change at any time

After a Brief Break, Here's A Merger Arb Trade For You

Regrettably I was out of town for several days and as a result it has been awhile since I've posted anything. So, I decided to give you all a conservative trade idea now that the market has had a huge run over the last four weeks. We are definitely getting overbought here, so tread carefully.

Anyway, I am a big fan of arbitrage opportunities and I think there is a merger arb play right now with the pending merger between Merck (MRK) and Schering Plough (SGP). The deal should close by year-end and the agreed upon cash and stock ratio (SGP shareholders get $10.50 cash and 0.5767 shares of Merck for each SGP share they own) implies a total deal value of $25.76 for each SGP share. That represents a premium of 9.4% based on Friday's closing prices for both stocks.

Normally, someone wanting to make this trade would simply short ~58 shares of MRK for each 100 shares of SGP they were long, wait for the deal to close, use the new Merck stock they receive to cover the short position, and pocket the 9.4% financial spread as profit. In this case, the actual return would be slightly less because Merck's dividend yield is above that of Schering.

However, there is another way to play this (and a more profitable one) because Schering Plough has a convertible preferred issue (SGP-PB). This security pays a higher dividend than the common (7.1% versus just 1.1%) and converts into SGP common in August of 2010. By that time, it will actually convert into Merck stock, since Schering will no longer be an independent company.

The attractive thing about the convertible preferred is that it too trades at a discount to implied value upon conversion. The convertible currently trades at $210 but would convert into $214 of SGP stock if converted today. Add in the $15 annual dividend and the spread is even higher.

How would an investor play this? Simply by buying the SGP preferred instead of the common when simultaneously shorting MRK common. Rather than using common stock from the merger to cover the short, you can simply wait until the preferred converts into common in August 2010 to cover the short. In the meantime you can collect the 9.4% deal spread, a 7.1% annual dividend as well as the 4% spread on the convertible security.

Full Disclosure: Peridot Capital has positions in both SGP and MRK at the time of writing. Positions may change at any time.

Intuitive Surgical Buyout Talk Likely Overblown, But Stock Could Approach Attractive Levels When Rumors Subside

If you follow the market closely you may know the name Intuitive Surgical (ISRG). The maker of the expensive da Vinci robotic surgical system had been one of the hottest stocks in recent years before the market took a tumble. At its high of more than $350 per share, the stock commanded a startling P/E of more than 70 but the recent market correction brought the shares back down to earth, to less than $100 earlier this year.

ISRG stock has soared well above $100 (it is $107 as I write this) in part due to rumors that Johnson and Johnson (JNJ) was considering making a bid for the company. JNJ has been active in acquiring medical companies lately, but this rumor is one that seems to be started by the hedge fund community more than by industry insiders.

If the same rumor keeps coming up over and over again (like this one) but a deal never materializes, it is usually a sign that it really is just a rumor. In the fast moving trading world, especially with a high flier like ISRG, starting a quick rumor can cause an immediate reaction in the market, and profits for those who start spreading it.

Since ISRG shares have come down so much from their obscene highs, I took a quick look to see if JNJ was even mildly interested, whether the price would be right or not. To my surprise, ISRG stock is not that expensive, thanks to the recent plunge. I am not in the camp that thinks JNJ will make a run at the company right now, but even on a standalone basis ISRG has an impressive cash hoard of $900 million, or about $22 per share, and no debt. I quickly calculated core operating earnings last year to be around $4.75 per share, so applying a very conservative multiple of 15x and adding back the company's cash gets you to a price per share in the mid 90's ($93 to be exact).

Considering ISRG was trading below $100 before these rumors resurfaced, any drop back to that level appears to be a very reasonable price for investors who like the company's prospects. And if a deal does come to fruition (I can't believe ISRG management would be inclined to do a deal at these prices), that would just be an added bonus.

Full Disclosure: No position in ISRG at the time of writing, but positions may change at any time