Key Insider at Orthopedics Small Cap Quietly Picks Up $1M Worth of Stock

There is no question that the orthopedics space is attractive from a technical and fundamental perspective. Over the last week, shares of Smith and Nephew (NYSE: SNN) picked up steam after it was disclosed that the same private equity group that took out Biomet (Nasdaq: BMET) may be looking under the hood of the UK based orthopedic juggernaut.

From a technical perspective, DJ Orthopedics (NYSE: DJO) has caught our attention, primarily because of its attractive size and robust margin history. DJO Inc. is a global orthopedic sports medicine company that designs, manufactures, and markets surgical and non-surgical products and services that repair, regenerate, and rehabilitate soft tissue and bone. The company has 600 products that are sold in more than 44 countries under brand names like ProCare, DonJoy, and Alaron Surgical. With leading market share in every business they operate in, DJO impressively grew its top line by 11.8% in 2005.

Beside DJO's potential as an acquisition target for a diversified player like Johnson & Johnson (NYSE: JNJ), we like DJO in terms of the opportunities it creates for investors looking to play the Baby Boomer theme. DJO continues to refine its knee-brace technology. Its biggest selling knee braces are geared to patients suffering from ligament injuries. Because a vast number of aging adults suffer from weakening joints or cartilage, we think DJO is poised to capture incremental sales from this expanding demographic. Experts are calling this new affliction boomeritis and that is precisely why millions of elder Americans can be seen walking around with elastic bandages. DJO's coolest product, in our opinion, is a knee brace for orthoarthritis of the knee. The perfect candidate for the OA Everyday knee brace that can delay knee-replacement surgery for years would be good ol' Sly Stallone. At age 105 and getting back in the ring, you can bet his knees are going to be killing him after the fight, but you know you're going to see this new movie just for the nostalgia factor. Approximately 365,000 knee-replacement surgeries are performed in the US every year, creating a seismic revenue opportunity for DJOs sales force and future product placement for Stallone in Rocky 12.

Detractors of DJO - and the orthopedics space in general - have argued incessantly that the bone-growth market is getting more competitive, and we agree. However, DJO's insiders seem to think that their company will prevail against all odds, and their showing us with their wallets: Key insider and Director Mitchell Blutt, MD quietly picked up $1M dollars worth of company stock on the open market last week, a comforting signal to those of us seriously thinking of playing the Baby Boomer theme vis-�-vis DJO's product mix, common stock, and managerial know-how. At 50x earnings, shares appear rich, but are nevertheless priced beneath the 57% EPS growth rate analysts are expecting for FY07. On a pullback, DJO would be a gift, in other words.

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