The next big ‘Peter Lynch-style 10-bagger’ from Roadrunner Stocks

Which stock are they calling the heir to Intuitive Surgical?

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Roadrunner Stocks is a newsletter run by Jim Fink at Investing Daily, and I think I’ve only covered his teaser pitches once before — that was back in October, and the four stocks he touted at the time are more or less a wash over that time period, half better performers than the market and half worse.  This latest pitch from him is a bit more interesting, though, because it’s a fairly well-reasoned argument for a single stock … and it’s in a sector that I agree is worth checking out.

Whether or not that means his idea works out is an open question, of course, but the great Gumshoe faithful want answers … so let’s go get ’em.

The idea he’s touting he calls “Operation 10X” — an opportunity to make ten times your money, the fabled Peter Lynch “10-bagger” that every investor lusts after. And it’s an orthopedics company.

And, of course, as with all good medical device stocks it gets held up to the mirror to see if it might bear a passing resemblance to Intuitive Surgical, the skyrocketing maker of the minimally invasive da Vinci surgical system (and yes, every time I see this I get a little grumpy — I sold my ISRG shares back in 2008, after a nice run but still more than $200 ago… I guess it’s some consolation that I haven’t had to sit through their rollercoaster run of $500-300-$500-$300 over the last year). Here’s what Fink says:

“Individual investors who recognized Intuitive Surgical and rode the powerful mega-trend for a few years got rich. And I mean really, really rich!

“Am I suggesting you buy Intuitive Surgical stock now? No. Absolutely not. That opportunity is over. It’s done.

“You may have missed Intuitive Surgical rocketing 2,624% higher. (Don’t feel bad, so did I!)

“But you are NOT going to miss this next one!

“And how do I know this?

“Because I’m going to make darn sure you recognize the next mega-trend on Wall Street that’s happening right now!”

I’m not so sure ISRG is “done”, though as a $14 billion company it’s already grown into its business quite a bit — it is, at least, more reasonably valued now than it has been in a long time, and I think many investors probably understate the value of having a ten-year head start on other robotic surgery systems and a large base of trained doctors who use your tools… but we’re not talking about ISRG today. What is the company they’re teasing for Roadrunner Stocks? Here are some more clues:

“My next 10-bagger was born when an orthopedic surgeon at the Mayo Clinic had a vision. The doctor had worked with several orthopedic companies and thought he saw some things the industry could do differently, and better.

“This surgeon believed in the Mayo Clinic mission that the needs of the patient come first. He wanted to make a difference in the quality of care provided to his patients suffering pain and loss of mobility from joint diseases.

“After leaving the Mayo Clinic, the surgeon started his own orthopedic company and then took it public. He is determined to provide innovative joint-replacement products designed by surgeons for their patients.

“The firm is now one of the world’s fastest-growing orthopedic companies. Sales exploded and they carved out a significant share of the $40 billion orthopedic implant market….

“My top-secret recommendation develops, manufactures and sells orthopedic implant devices, related surgical instrumentation and biologic services to hospitals around the world.”

The orthopedic market is pretty concentrated at the top, at least in the big areas like hip and knee replacements, with Johnson and Johnson (JNJ), Stryker (SYK) and Zimmer Holdings (ZMH) sharing dominance in most areas, but there are a surprisingly large number of smaller players who bring innovation and niche expertise… I guess there will always be entrepreneurial surgeons who think they can make a better shoulder socket, and many of the startup companies end up being bought out by the large firms or merging with each other, just like in pharmaceutical development.

So this isn’t a tease for one of those biggies — they are all pretty solid companies, and Zimmer is actually looking pretty interesting again (I suggested that one back in 2009 as the cheapest of the knee-and-hip crowd, but dropped it when it narrowed the valuation gap — it has since done very well, and I really like their deal to buy Biomet and almost double their size), but Fink is suggesting a far smaller company… you can’t make a “10 bagger” claim with a straight face when your stock starts at a $15-20 billion market capitalization.

His pitch relies on the increasingly demand for joint replacement, with arthritis hitting the baby boomers hard and with the market only improving as Medicaid covers more and more patients (people who previously would never have been able to afford a new hip).

Here are some more clues:

“… they have cutting-edge, industry-leading orthopedic products protected by over 100 crucial patents….

“… inked a long-term deal with Premier Healthcare Alliance. The contracts are for bone cement and total joint replacements including hip, knee and shoulder implants. Premier is one of the largest healthcare specific purchasing alliances in the United States….

“… quietly acquired two key competitors. These targeted acquisitions allowed the company to expand vertically into the rapidly growing spinal surgery area….

“… strong top-line and bottom-line growth, free cash flow and a pristine, debt-free balance sheet….

“The CEO and Prominent Wall Street Fund Managers Effectively Control the Public Float of Stock.

“The company only has 13 million shares outstanding. But the former Mayo Clinic surgeon who founded the company and is now the Chairman and CEO owns over three million of those shares, so the actual public float is about 9 million shares….

“… other major holders are BlackRock, Gabelli Funds, Vanguard, Wells Fargo Private Wealth Management, Goldman Sachs and Kennedy Capital Management.”

Ring a bell for anyone? No? OK, we’ll feed the clues into the gaping maw of the Mighty, Mighty Thinkolator — which boasts a nice new undercoating after our harsh New England winter. We get our answer pretty quickly for a Monday morning, this is: Exactech (EXAC)

Which is indeed a small orthopedic implant company, with a market cap around $300 million. And it’s been public for almost 20 years, so it’s actually a little bit surprising that it’s still independent — though the large insider ownership may have something to do with that (the founder and his family are still running the show, and along with other insiders they control about 40% of the stock). They primarily sell systems for hip, knee and shoulder partial and complete replacement, but also offer a variety of implant and cement products for orthopedists and do have a growing spinal business that they built through acquisition.

Doctors love investing, so hopefully we’ve got a few orthopedists out there who can opine as to where Exactech’s products fall in the spectrum — I don’t know what their competitive position is, just that they are dramatically smaller than Stryker and Zimmer and they are presumably at a sales disadvantage when going up against the massive sales forces at those larger firms. Orthopedic devices typically have high gross margins (meaning, the cost to build a knee implant is far less than they can charge for it), so when you’re small a new product or a little bit of growth can have a bigger impact, but it also means you’re less efficient (profit margins are considerably smaller than the big guys) — which is why big companies can show a nice return by swallowing up small ones and getting rid of extra overhead.

The lead products for EXAC are really knee replacement, including a medical device they’re selling called the GPS system for placing and aligning knees, and extremities, including their fastest-growing product, the Equinoxe shoulder system. They are growing their spine business, too, though it’s still quite a bit smaller than knee, hip and extremities — and they’re seeing some slack in their biologics business (bone implant material, particularly). If you think the analysts are on target and the company is going to grow earnings at an average of 10-15%, then it’s certainly a reasonable buy here — but for this year the company is guiding to only about 8% earnings growth, so that makes it a little bit tighter (analysts see them popping up to better than 10% growth in 2015).

They have beaten earnings estimates for several quarters in a row, but they haven’t been “blowout” beats — just a few percent each time. And they do, as teased, have some excellent small cap fund managers from Royce and Gabelli holding shares, large insider ownership, a fairly quiet (maybe not intentionally) push into growing their spine business and improving their salesforce — including a push into selling their GPS knee system, which they hope will spur more knee implant sales. They’re also continuing a transition of leadership, though that’s clearly been in the works for a long time (David Petty is taking over as CEO from his father, founder William Petty). Looks like an interesting stock, but that’s all I know about ’em so far — if you have an opinion on EXAC or other orthopedic implant companies, feel free to let it out to breathe… just use the friendly little comment box below.

And, of course, if you’ve tried Roadrunner Stocks we want to know what you think of ’em, just click here and you can review that letter for your fellow investors (we sometimes forget to ask, but we’re always happy to hear about letters our readers have subscribed to — you can click here to see the alphabetical list of all the letters our readers have reviewed, or to add your own thoughts).

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42 Comments on "The next big ‘Peter Lynch-style 10-bagger’ from Roadrunner Stocks"

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Leo S
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0
Leo S
May 5, 2014 3:38 pm
I have had two knee replacements. The first one a Stryker Duracon. The second a Stryker Triathalon. Both were installed by the same doctor without telling me of the change in prosthesis. The second one needed a revision (thicker plate) three years later and is still problematical. In studying problems with different prosthesis on the web it appears that the Smith and Nephew products are much more reliable. At least their labeling is more error free. In getting the operative record on either operation from the hospital it was pretty cryptic and of no help, I assume to protect the… Read more »
Leo S
Guest
0
Leo S
May 5, 2014 3:42 pm

This is getting old———the box! the box!!!!

bwd1up
Irregular
181
bwd1up
May 5, 2014 4:48 pm

the box!

hipockets
Irregular
998
May 5, 2014 5:52 pm

Thank you, Travis. Looks very interesting.

White Rabbit
Guest
0
White Rabbit
May 5, 2014 7:34 pm
I pulled up a 10 year chart to see if I could draw any conclusions on EXAC’s price movements. It reached a high of about 31 3/4 during July of 2008, and then fell to a low of about 10 1/4 during March of 2009. This rise and fall were on heavy volumes compared to subsequent trading volumes. From that low, it rallied to a high of 22.34 during the week of April 26, 2010. It never broke that high until October 24, 2013. That was part of a move to 25.14 on Jan 7, 2014. followed by a fall… Read more »
dgcannon
Member
27
May 5, 2014 8:10 pm

A ten bagger at this price would require a share price of $210.00. I’ll have to pass on
this one.

drbonz
Guest
0
Dr Bonz
May 5, 2014 8:47 pm
As my name implies, I am an orthopedic surgeon. While I have heard of this company (medically, not investment wise) it is FAR from a big player in the implant world. Zimmer, Stryker, Biomet (which was just purchased by Zimmer), Depuy (which is owned by J&J), and Smith and Nephew are the main players. All are huge companies with many divisions. EVERY orthopedic surgeon has seen ads from all of these companies. I can honestly say I have never seen an Exactech ad. Implant sales are frequently directed by hospitals. They are the ones who pay for the implant (and… Read more »
Tomaz Molliche
Guest
0
May 5, 2014 11:07 pm

Nail on head, Dr. Bonz. Thank you for the wonderful insight.
Travis, keep up the fantastic work on this site, please.
Tom M.

Outlawjoseywales
Guest
0
Outlawjoseywales
May 5, 2014 8:47 pm

What’s this box noise? I have no clue what you are talking about. Are you friends with that Frank Archambeau guy?

wneils
Irregular
40
wneils
May 6, 2014 7:38 am

Yeah! Been on this forum for a while and the BOX thing eludes me also. But then a lot of things fall in that category.

enginer
Irregular
2
enginer
May 5, 2014 9:14 pm

I just noticed that the stock plummeted from 23 to 21.5 on the release of last quarter’s lackadaisical results, SEC Form 10-Q,
Knees 2014 over 2013 up 0.3%
Extremities (?) up 25.4%
Hip up 3.5%
Biologics & Spine DOWN 3.9%
Other, Down 3.4%
Overall, Up only 6.7% all on the strength in Extremities.
Expenses look like they are climbing, relative. Maybe good for a pop, but I cannot see 1000%…

emanigol
Member
2
emanigol
May 5, 2014 10:50 pm

I like this. First “This surgeon believed in the Mayo Clinic mission…”. Then ” After leaving the Mayo Clinic…”

Stan Coleman
Guest
0
Stan Coleman
May 5, 2014 11:22 pm

Where do 3D implants fit into the joint replacement business?

Tom M
Guest
0
Tom M
May 10, 2014 9:34 pm
Yep, head to India for that hip replacement. I mean, what could go wrong with that? Pro #1 : Docs earn considerably less, and the nurses work for $65 per month. Pro #2 : No medical liability insurance costs. … health care providers are a protected industry. Pro #3: They didn’t practice on animals in med school (unless they went here). Con #1 : Docs earn considerably less, and the nurses work for $65 per month. Con #2 : No medical liability insurance costs. … health care providers are a protected industry. Con #3: They didn’t practice on animals in… Read more »
Deb
Guest
0
Deb
May 6, 2014 8:36 am
So, if I need an implant I should seriously look to travel outside this country. I have heard hips are better replaced in India. Not sure where to go for knees. And with the direction medicine is taking here in the US, I think any investing in the medical arena involves an extra dose of risk and requires research above and beyond a level of reasonableness. My brother had the same experience with his two hip replacements as the guy with two new knees. First one worked out pretty well. Second one, just a couple years later, not so much.
Klaus Schonfeld
Guest
0
Klaus Schonfeld
May 11, 2014 1:53 am

I live in the Philippines. I have met Westerners here who had successful and less expensive knee replacements. I have had satisfactory medical treatment here, including a brilliant 2-hour session during which my kidney stone was removed ultrasonically at a total cost of $1,500. If you chose the right time of year, the surgery could be combined with a nice holiday.

John Harris
Guest
0
John Harris
May 6, 2014 12:10 pm
I have no idea how much spine related business they do but I would not bet on that growing. Fusion cages, spinal fusion, and disc replacement surgeries are under heavy fire for lack of evidence they are any more effective than conservative care and insurers are more and more refusing to pay for much of what was a rapidly ballooning spinal surgery boom that is now being questioned – too often based on profits to doctors and surgical centers (often owned by the surgeons) not patient outcomes with “honorariums” going to doctors who use the most products from the device… Read more »
Frenchy
Irregular
473
Frenchy
May 6, 2014 1:02 pm

Not for me but thanks Travis as always.

blinddaytrader
Irregular
4
blinddaytrader
May 6, 2014 5:37 pm

Very helpful prospectives here. Subscribing. (+1 for the commentless subscription system)

tompaol
Member
56
tompaol
May 6, 2014 7:26 pm

Great info: I have seen this stock touted by other newsletters as well. I have a much better perspective now.
Thank you Travis and Dr. Bonz

drbonz
Irregular
260
drbonz
May 6, 2014 11:29 pm
Guys, first of all, I can’t imagine you would get better care, or a better result with your total joint arthroplasty in India then you would here is the US. Cheaper maybe, but not better. As for the two posters who are comparing right and left joints and the fact that one apparently did well and the other didn’t, just let me say that you simply cannot compare one surgery to the other in this way. This is why I insist on never having two of my patients who I just did total joints on, in the same room post… Read more »
blackwolf
Irregular
93
blackwolf
May 7, 2014 11:50 am
Dr. Ed: Thanks for posting. I thought I was clear on the Smith and Nephew article that it was regarding labeling. Their labeling errors were less than 20% of anyone else. I think you would agree that it is nice to know how thick the spacer plate is that you are putting in. I was not told why my 2nd knee was bending in the wrong direction before the revision three years later, because the doctor is so non-communicative. I have consulted other orthopedists in the area, because of 2nd knee pain and all they say is “oh he is… Read more »
Gary W
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0
Gary W
May 8, 2014 5:28 am
Dr. Bonz, FYI, I’ve been a patient at Stanford University hospital and at Kailash Hospital in Noida, near Delhi, India. And my daughter is a second-year resident. I don’t know about better, but India was 10 times cheaper with substantially the same doctors’ skill level. But in India I felt definitely more human. American medicine treats patients like objects to be put through standardized processes, not as individuals with ideas and feelings. In India, doctors listened to me; nurses responded to my buzzer within 60 seconds; visiting hours were whatever I wanted; a friend or family member could sleep in… Read more »
blackwolf
Irregular
93
blackwolf
May 8, 2014 11:47 am
Gary: Your statement: “American medicine treats patients like objects to be put through standardized processes, not as individuals with ideas and feelings.” I totally agree. Unfortunately this is the paradigm we are faced with. Someone on another thread begged for a “single payer system”. How quaint a suggestion. That is what I was raised on. A single payment to the doctor, no insurance company or government to get in the way, and we did just fine. We were also raised on welfare, which is a whole other story. We did not get a check to buy whatever frills suited us.… Read more »
KennyG
Irregular
2845
KennyG
May 8, 2014 1:49 pm
Leo: regarding that concierge medicine. My doctor recently changed his practice to such a service. In his case it was thru “MDVIP”. The cost was about the same as you mentioned, $1500 per year. But the part about they do not take medicare is not so….at least with MDVIP. That cost of $1500 is basically a yearly membership cost that ‘permits’ me to continue seeing this particular doctor. On top of that I still get charged for services as prior to joining this program. The doctors practice continues submitting bills to Medicare and 3rd party insurers and all deductions and… Read more »
blackwolf
Irregular
93
blackwolf
May 8, 2014 4:04 pm

KennyG: Wow! thanks Kenny, I really appreciate the post. Maybe if enough of us do this we can eventually return to something resembling the good old days. Of course a big objection will be “what about the poor people”. We were poor, and lower than hammered whale doo doo and we got taken care of just fine. People looked out for each other then and they still do but the government gets in the way with a one size fits all. I am calling the concierge today. Take care

Elliot
Irregular
418
May 7, 2014 8:07 am

(checking the box)

Kenneth Green
Guest
0
Kenneth Green
May 10, 2014 10:31 pm
I just had to chime in with some info for all those baby boomers that are looking to get knee or hip replacements in the near future. my background is engineering. In 2005 I tore the cartilage in my right knee. A very able surgeon put me out of my misery by skillfully snipping and removing the torn piece, fabulous, pain free again. About three years later pains back. The same surgeon explains the reason, bone on bone where the torn cartilage was removed ( by the way, it is now possible to reattach the tear. I’ll explain later. The… Read more »
drbonz
Guest
0
Dr Bonz
May 11, 2014 1:39 pm
Kenneth: In 2008, you were in your mid to late 70s. I doubt that a torn meniscus cartilage was the sole cause of your arthritis. You may not have had SYMPTOMS of arthritis before your meniscus tear, you most likely DID have it. Often, an event (such as yours, an injury, a tear) is essentially the “straw that breaks the camels back” and causes your previously asymptomatic arthritis to become symptomatic. As to your claim that we can “fix” a torn meniscus, this is only partially true. Meniscus cartilage is, for the most part, void of blood vessels (except for… Read more »
Tom O'Neill
Guest
0
June 17, 2014 2:49 am
Dr. Bonz, I read your reply dated May 11, 2014 in this thread regarding joint replacements and, in particular, about the removal of torn meniscus material in the knee joint. I had reconstructive surgery on my right knee in January 1977 when I was a mere lad of 33 years. The surgery was complicated by the loss of the blood supply to the joint from the tibia. My surgeon had to drill a dozen small holes down into the bone to bring the blood supply up. My torn meniscus was removed nearly completely, all but a small ring of cartilage… Read more »
new_novice
Irregular
0
new_novice
May 12, 2014 3:32 am
I am not a lawyer, but I am aware of several people who have had to have revisions of problematic knee replacements who either sued successfully or whose costs were totally paid for. The one name I’m aware of that I can remember most easily is “Depuy.” I believe the law firm of “Zocolof (?sp)” is expanding their search for victims beyond bad drug side effects but for failed joint repairs. Are there some out there who keep track of the number of such suits (successful or not) involving orthopedic hardware. Given Hospital efforts to avoid suits, would they be… Read more »
new_novice
Irregular
0
new_novice
May 12, 2014 3:44 am

PS: for those not here in the Southern part of the US, the law firm of “Zocolof” (sp) sponsors advertising (going on for nearly 10 years) on an almost daily basis looking for: “have you or a loved one ever taken Zyprexa, Risperdal, …. or drug X… then you may be entitled to compensation…. etc.” I know they have expanded their reach to orthopedic devices, but have just not heard the commercials often enough to remember the companies involved. However, I do recall the mention of the DaVinci device as another target for law suits.

drbonz
Guest
0
Dr Bonz
May 13, 2014 7:05 am
The implants that you have seen the ambulance chaser….ahhhhh, I mean the “TV attorneys” (I make that distinction because I realize that there are many very good lawyers out there who truly do want to help people and then there are the hucksters you see on TV), are actually on HIP replacements. There were some “metal on metal” hip implants (instead of placing a polyethylene socket into the metal socket that goes into the hip socket, these implants used a metal ball going into a metal socket. Most of these worked OK but there were a few out there where… Read more »
drbonz
Guest
0
Dr Bonz
May 13, 2014 7:09 am

Frank: You are correct about the commercials on the Davinci robot. It is often used in urological surgery (among others). But if you stick around long enough, you’ll see a commercial for pretty much ANY device or medication (or class of medication).

As far as hospitals trying to avoid lawsuits, these suits are usually against the company and (thank goodness) not against the doctor or hospital (at least not yet).

sgf
Guest
0
sgf
June 16, 2014 10:23 am
I am a “very” active 50 year old slender female who found herself needing a total hip replacement at a very early age. I have since been researching this area. I have had my very successful (anterior approach) replacement with a Smith and Nephew device. As Dr Bonz mentioned, I chose my surgeon,(sports medicine group) and due to his expertise with the Smith and Nephew product, he chose the prosthesis he preferred for my situation. All of the printed material the hospital and the group gave me, was printed by Smith and Nephew, I do not know if this is… Read more »
willran2
Irregular
126
willran2
August 26, 2014 7:28 pm

Travis–Thank you for the article.

willran2
Irregular
126
willran2
August 26, 2014 7:29 pm

Dr. Bonz— Thank you for your insight.

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