Mako: Blood Is Flowing in the Street

NEW YORK (TheStreet) -- If you're a current Mako Surgical (MAKO) investor, Monday night's sales release must have felt like an operation filled with complications and every side effect has your name on it.

Florida-based medical device maker Mako Surgical announced that Mako sold nine RIO systems in the second-quarter, well below Wall Street's expectation. The sales figure for the first half of 2012, is a disappointing 15 units.

On a somewhat positive note, utilization rates are in line and suggest doctor acceptance of the value provided. The company's proprietary MAKOplasty procedures for second quarter rose 66% year over year for a total of 2,590. For the first six months of 2012, a total of 4,887 procedures were performed, a 71% increase year over year.

A best-case scenario is a delay in sales until later this year, but it doesn't appear to be the case as Mako has adjusted 2012 anticipated sales from 52 to 58 systems down to 42 to 48 RIO systems.

Based on my experience with gap downs following disappointing sales similar to MAKO's, the odds favor greater downside with Wednesday or Thursday marking the short-term low. After a bounce, expect further downside pressure. It's not quite time to wish for a price above the previous closing of $20, but MAKO does have strong support near $14.

Friday or early next week will likely find bargain hunters picking up shares cheap to flip over. If Thursday appears to be closing below Wednesday's low, I may join with the bargain hunters for a quick one night stand.

MAKO Surgical was downgraded to Neutral from Buy at Summer Street. Michael Matson, a New York-based analyst with Mizuho Securities USA has a current price target of $15. I believe Michael is optimistic to believe Mako will move higher and stay above $15 anytime soon.

Bargain hunters and short sellers covering positions could push the price up about 20% in relation to the gap down price. Looking at the chart, I expect short-term resistance near $15.

Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $15 a share today, but also be prepared for a closing under the opening price, and more than a 50% chance of a close under the open. Short interest is a massive 50% of the float. There is a reason why short sellers are considered the smart money and nothing demonstrates it like Mako.

If you are looking for Tuesday's drop to signal a short term buying opportunity, you are likely going to find the end of the day Wednesday or Thursday better than Tuesday.

There is no hurry buying the dip with Mako. Stocks dumping as a result of profit warnings usually take a full two good earnings quarters to recover. Take your time and do your homework before allocating capital here. Look for the second break above $20 as the one that "sticks."

Mako already was trading below the widely followed 200- and 50-day moving averages, adding fuel to the liquidation based on chart technicals.

Stryker ( SYK) a Michigan-based company operating in the same space as Mako is an alternative to investing in Mako. Zimmer Holdings ( ZMH) makes for another alternative. While Mako continues to lose money, Stryker and Zimmer are not only executing well, but they also pay a dividend of 1.6% and 1.1% respectively.

Stryker's short interest is a very low 1.8% and Zimmer is currently 3.2%. Compared to Mako's 50%, Stryker and Zimmer might as well have zero short sellers. I very rarely see short interest climb over 50% and a check with my broker shows no shares are available. This indicates that short interest is actually lower than what it would be if short sellers could locate more shares.

Both Stryker and Mako have disappointing levels of insider buys relative to sales. However, Mako's insiders are selling hand over fist in the last six months.

While Stryker insiders have liquidated less than 2% of their holdings, Mako insiders liquidated over 14%. Zimmer short sales are elevated too, but the sales are based on a much smaller amount held. All in all, Stryker appears to be the best of the three.

What's the best play with MAKO? There should be a very attractive trade coming up Wednesday and or Thursday. Near the end of the day if still trading lower, sell out of the money puts.

Option contract volume exploded on Tuesday with big bets in both directions. Market makers will attempt to balance their books with offsetting contracts, but when unable, they mitigate risk through stock. The increase in option demand has pushed premiums higher, creating opportunity if you don't incorrectly predict direction.

Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time the stock should bottom. It's not one to get greedy with, hold on for a few days and as the implied volatility falls (hopefully with a nice dead cat bounce) exit out with a quick hit and run for profits.

Otherwise for longer term investors, the best play is to wait until after the next earnings release for an entry.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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