Fundamentally, the tiny $68 million medical device company in question looks worse than Joan Rivers sans makeup. It has lost money in each of its last five quarters. Sales are down 33% compared with last year And in the last two years, its stock price has fallen from over $6 to as low as $1.02.

Yet despite all its warts, seven company insiders — including the president, CEO, CFO, chairman of the board, an officer and two top VPs — bought 89,000 shares for their own portfolios between April 13-17.

As Peter Lynch once said, “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” Clearly, the insiders at this company are betting that their own stock is undervalued and set to rise.

The company I am talking about it CardioDynamics International Corp. (CDIC:NASDAQ).

CardioDynamics is a medical device company that specializes in an important technology called impedance cardiography (ICG). Without getting too technical, ICG technology makes it possible to non-invasively measure the heart’s ability to deliver blood to the body. And the company’s lead product, BioZ, uses this ICG technology to detect irregularities in patients that could lead to heart failure or even death.

God bless progress.

Prior to BioZ, doctors had to use a time-consuming, costly and potentially dangerous invasive procedure called pulmonary artery catheterization (PAC) or the Swan-Ganz catheter (SGC) to get the same kind of data. That process involved giving a patient either a local or general anesthesia and then inserting a catheter into his chest to detect any irregularities. Anytime you are dealing with anesthesia and the heart at the same time, there is a real risk of complications — even death.

Needless to say, there is a definite market for CDIC’s ICG noninvasive technology (which, by the way, has been fully approved by the FDA). And that was confirmed two weeks ago.

On April 6, the company reported earnings for Q1 06. Despite announcing a loss of $3.5 million and a 33% falloff in sales, there was some good news buried far away from its financials.

The company said that the results from two important trials were recently published regarding its BioZ and ICG technology. The first trial (an 11-center CONTROL study) showed that the company’s BioZ-directed therapy was more than two times better than standard care for controlling blood pressure. And the second study (the Cleveland Clinic’s ED-IMPACT study) proved that the underlying technology used by BioZ is the most powerful predictor of short-term heart failure or death.

As a result of these findings, CDIC said it is already seeing a sizable increase in sales for the early second quarter. And it just so happened that days after this was announced, seven company insiders spent more than $140,000 of their own hard-earned cash to buy this stock between $1.23-1.26 a share.

Take a look at the insider buying spree that took place only a few days ago…

– CEO Michael Perry bought 24,200 shares between $1.23-1.25 between April 13-17
– CFO Steve Loomis bought 4,000 shares at $1.26 on April 13
– Chairman of the Board James Gilstrap bought 40,000 shares at $1.25 on April 17
– Officer Richard Kalich bought 5,000 shares at $1.23 on April 17
– VP Richard Trayler bought 2,300 shares at $1.26 on April 13
– Officer Rhonda Rhyne bought 11,400 shares at $1.26 on April 13
– VP, Russell Bergen bought 2,500 shares at $1.26 on April 18.

There are three things I like about this pattern of insider buying.

First, CEO Michael Perry laid down $30,066 of his own money to invest in CDIC stock. While this may not seem like a huge amount of cash, you have to remember, he “only” makes $275,000 a year. So he just put about 11% of his annual salary at risk. My guess is he doesn’t want to lose that money.

Second, the chairman of the board made a sizable purchase of his own. He bought 40,000 shares at $1.25 a pop. By my calculations, that’s a $50,000 investment. Again, I don’t know a lot of people who can easily lose $50,000 and not feel awfully bad. You can bet he thinks the stock is a steal at $1.25.

And third, I like the fact that everyone from the CFO, a couple of VPs and two officers got in on today’s action at the same time. This is a classic example of “cluster buying.” And it usually means they see the stock rising in the future.

At the end of the day, there are several potential catalysts that could cause this $1.40 stock to potentially double or triple:

1) Thanks to positive results from the company’s 11-center CONTROL study and the Cleveland Clinic’s ED-IMPACT study, sales for its flagship product, BioZ, should pick up starting in Q2.

2) CDIC recently launched a brand-new product — the BioZ AdvaSense. It began shipping in early second quarter 2006. Of course, it is far too early for us to know how strong those shipments are, but the insider activity seems to suggest they are pretty good.

3) Medicare is considering broadening ICH hypertension coverage. If this happens, CDIC could see a serious increase in demand for its products.

Of course, there is no saying how many (if any) of these catalysts will come to fruition. But clearly, the guys and gals who run the company (the people who are in the trenches every single day) like what they see. After all, they just shelled out over $140,000 of their own money to own this stock for themselves.

Remember, insiders are investors like you and me. They have the same number of investment choices we do. So when they decide to invest their own hard-earned money in their company’s stock, you should pay attention. History has proven these stocks tend to rise…

Happy investing,

James
April 20, 2006

A $1.40 Stock the Insiders Love was originally featured in the Penny Sleuth.