Out of the Sick Bed and Still in the Pink: Insiders Love Owens Corning

By Michael Brush
Exclusively for InvestorIdeas.com
November 09 2006

Back in early October, insiders at wall board maker Eagle Materials (EXP) stepped up and bought shares in their company big time.

But I took a pass on writing about the stock for Insiders Corner – or buying it for my personal portfolio – because at the time there was so much anxiety about how demand for housing was falling through the floorboards.

Bad move.

Eagle has risen over 20% since then to trade at $40 from $33 or so where insiders bought.

I should have known that would happen. As a rule, when insiders place bets against a crowd whipped up by a frenzy of negative headlines, you make money betting with the insiders.

It hurts to miss a fairly obvious move like the big one-month gain in Eagle Materials. But it comes with territory when you are in the market. Besides, it’s the future that matters, not the past -- and now the market is giving us another chance.

Let’s take it.

A second chance

Another building supply company – Owens Corning (OC) – recently came public. The move saw a flurry of buying from a parade of insiders on Nov. 7. A dozen insiders, from chief executive David Brown to the vice president for siding solutions Brian Chambers, stepped up to buy more than $1.3 million worth of stock at $27.40.

It makes a lot of sense to join them, and here’s why.

Based in Toledo, OH, Owens Corning is a leading producer of residential and commercial building materials. Saddled with asbestos claims, the company went into bankruptcy in 2000. It came out and began trading a few days ago.

Owens Corning is no small-cap stock. It has a market cap of $1.5 billion. But from time to time we go outside the small cap realm of this column, when compelling insider signals arise. That’s the case here.

The company had net sales of $6.7 billion in the twelve months ending in September, during which time it had adjusted pro forma operating income of $561 million.

Owens Corning has a healthy amount of cash flow, plus lots of cash. The company has $1.5 billion in cash, or around $26.5 per share, which is near the recent share price of $27.75. True, it also has $3.2 billion in debt. But the stock trades for a paltry trailing price earnings ratio of 2.3. And it has a miniscule price to sales ratio of .22. Compare that to 2 and .75 for Eagle Materials and USG (USG), another company that makes wall board. Ok, they are not entirely comparable businesses, but the gap still seems too big.

Why is Owens Corning trading so low? Investors are concerned about weakness in the housing sector, of course. But they may be making a mistake, for two reasons.

First the Fed seems to be done raising interest rates, so the worst may be over for residential housing. I’m not saying the market will bounce back next quarter. There is still a lot of speculative buying to shake out. But the shock phase is probably behind us.

The National Association of Home Builders thinks 2007 housing starts will be 1.62 million, just below the seasonally-adjusted rate of 1.665 million for August. Yes, that’s down sharply from the two million seasonally-adjusted starts for August 2005. But it would represent a leveling off of sorts, compared to August of this year. Worries about a slowdown in the economy are probably overdone, as well, which we’ll get to in a moment.

More than just housing

Next, the company actually gets a lot of revenue outside of home construction, even though it may be best known for its pink insulation.

Owens Corning has a lot of moving parts. But to simplify things – and see how much revenue comes from hot areas like commercial construction – let’s break the company down into four categories.

Insulation

Owens Corning is North America’s largest insulation producer. It gets about a third of its sales from insulation. Sure, 60% of that is linked to new residential construction in the U.S. and Canada. That hurts. But 19% comes from commercial and industrial building in the U.S. and Canada – where growth is currently on fire.

And 13% comes from repair and remodeling. Ok, home refinancing isn’t what it used to be. But employment and income growth are solid, so not all remodeling projects are on hold. Besides, with energy prices so high, insulation projects are back in vogue.

Roofing and Asphalt

Owens Corning is one of the biggest makers of asphalt roofing shingles, a segment that provides roughly another third of revenue. Here, 67% of demand comes from repair and remodeling -- which has little to do with new construction trends. When you need a new roof, you need a new roof. (In case you were wondering, roofs on average need to be replaced every 19 years, says the company.) Another 12% of demand comes from the healthy commercial construction market. Only 21% comes from new residential construction.

Other building material

This chiefly means vinyl siding and fake veneered stones. Here, about half of demand comes from new residential construction, but 42% comes from repair and remodeling.

Composites

Owens Corning also makes glass fiber material put in composites used in automobiles, rail cars, shipping containers, refrigerated containers, trailers and commercial ships. This accounts for about a fourth of revenue. Most of the demand for these products has little to do with the housing market. Instead, it’s all about the economy. It should remain healthy because of:

• historically low interest rates


• a weak dollar which juices demand from abroad where economic growth is strong in many areas


• continued big deficit spending by the federal government.

About 40% of demand in the composites segment comes from outside the U.S. and Canada. The company thinks growth will continue at more than 5% a year.

To sum up, over half the demand for company products is linked to residential repair and remodeling and the healthy commercial construction market. About 36% comes from new residential construction in the U.S. and Canada.

And what about the asbestos liability? That’s a plus for investors, in a way. Thanks to Owens Corning’s contribution of as much as $3.5 billion to an asbestos trust, the company will get a break on taxes for several years.

The bottom line: All of this is not to say that it’s back to the races this quarter. It’s not. The company itself has guided for further weakness this quarter in many of its segments. But this is probably already priced in. And if, like me, you think many people are still underestimating the health of the economy, then investors are being too cautious in shunning Owens Corning. They are insulating themselves from economic weakness that won’t play out. The insiders seem to agree, which makes the stock a buy right here.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorI deas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp . InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

Brand-X Airplane Parts Maker: Cleared for Take Off

By Michael Brush
Exclusively for InvestorIdeas.com
October 26, 2006

If you look out the window next time you are on a plane and see a simple white engine with unadorned black lettering – sort of like a box of off-brand macaroni – don’t be too surprised.

The age of generic replacement parts for airplanes is upon us.

Of course, you probably won’t ever fly on a plane that has an entirely “generic” engine. They’ll still be made by the three trusty, dominant jet-engine builders: General Electric (including CFM International); Pratt & Whitney which is a division of United Technologies; and Rolls Royce.

But the replacement part business is another matter. For years it has been a lucrative playground for these big-three plane engine makers. Using the power that comes with oligopoly, they’ve force regular price hikes of 5%-12% a year for parts on the airlines, air cargo companies and the military.

They’ve made good use of the old “razor and blade model” so idolized by Warren Buffet. They’ve sold the engines cheap and made their money on the replacement parts.

But now, a small Hollywood, FL-based company called HEICO (HEI) hopes to change all that. HEICO makes generic replacement parts that are cheaper than those produced by the big engine makers.

In partnership with Lufthansa Technik, which has a stake in HEICO and is one of the biggest companies in the world doing aircraft overhauls, HEICO wants to break open the replacement parts business and get a bigger foothold.

Putting up resistance

That’s been hard to do because the big engine makers want to protect their lucrative aftermarket for replacement parts. So naturally they have raised questions about the quality of generic engine and airplane parts, known in the industry as “PMA parts.” PMA stands for “parts manufacturer approval,” or the regulations under which these parts are given the green light.

But in early 2006 Pratt & Whitney announced it was moving into the generic plane parts business itself. It’s developing parts for the CFM56-3 engine, one of the most popular engines. Made by CFM International, the engine is used in the Boeing 737 and the Airbus A320 planes.

With one of the big three jet engine makers going into the generic parts business, it has a newfound respect.

Wind at its back

In other ways, HEICO now has the wind at its back. Right now, generic parts only account for 2% of the $14 billion parts market. So there is plenty of room to grow. Consider these trends that may help.

• Around the globe, the aircraft fleet is aging. And it is being used a lot more, as air travel has bounced back. That means more wear and tear. So maintenance is growing.


• As most travelers know, airlines are looking everywhere to cut costs including under your pillow -- that is back when they used to give you a pillow. So it stands to reason that airlines welcome generic parts – parts that represent 60% or more of the cost of an overhaul. HEICO has over 5,000 parts approved – including things like combustion chambers, compressor blades and seals. It hopes to have 350 new parts in 2006. But there is much more room to grow here, too. There are anywhere from 10,000 to 20,000 parts in jet engine platforms.


• HEICO struck a deal with the China Aviation Import and Export Group Corporation (CASGC) last February. Owned by the Chinese government, CASGC purchases the aircraft and engines for Chinese government airlines. The agreement allows HEICO parts to be sold in China – giving it exposure to robust economic growth in China. HEICO also has partnerships with American Airlines, United Airlines, Delta Air Lines, Air Canada and Japan Airlines. These partnerships help it get a better handle on what parts to make.

Besides trying to build the market for generic airplane parts, HEICO should continue to grow through acquisitions. It has purchased 27 small businesses in aerospace, defense, and electronics since 1996. Growth through acquisitions should continue.

The insider buying

All of these factors help explain why four directors and chief executive Laurans Mendelson bought about a quarter million dollars worth of HEICO stock at $35.39 on October 20, according to Thomson Financial.

Chief executive Mendelson’s purchase was a particularly bullish signal, and not only because it was the largest. Besides that, Mendelson already owned about 1.4 million shares, and he has around 212,000 unexercised options. Whenever you see a chief executive topping off big exposure to a stock like this, it’s an even better buy signal. Mendelson has also cashed in over 200,000 options in the past few years. But he hasn’t sold any of the stock.

Five analysts project HEICO will turn in 20% annual earnings growth over the next several years, according to Thomson Financial.

An options overhang

One sour note is that HEICO issues a lot of options, which isn’t unusual for a defense and aerospace company. However, it creates a dilutive overhang. Company documents show there are 2.8 million options outstanding with an average exercise price of around $10. That’s over 10% of the total shares outstanding of 25.3 million. Those options will either dilute the shareholder base as they are cashed in, or the company will have to spend cash to buy back stock to offset the dilution.

Besides designing and selling parts through its Flight Support Group which brings in about 70% of revenue, HEICO also has an Electronic Technologies Group. This division provides sophisticated electrical and optical systems used in aerospace, defense and communications – things like infrared simulation and test equipment, power supplies, electromagnetic interference shielding, and amplifiers. These products have higher margins. The division accounts for about 30% of revenue.

An unanswered question

But getting back to the generic parts business, one burning question probably remains unanswered in your mind. Are generic parts safe? The answer: Generic parts are certified by the Federal Aviation Administration as being equal or superior to the original manufacturer parts they are replacing. There. That should make you feel better.

The bottom line: This looks like one of those situations where a company will continue to gain market share because of a simple, but powerful force in capitalism, the desire in private industry to drive costs down. One brokerage recently initiated coverage and a big part of HEICO’s strategy is to grow through acquisition – so I wouldn’t be surprised to see some kind of financing around the corner. That can temporarily bring shares down. Otherwise, HEICO looks like a buy right here.

Disclaimer

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.

For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

Insiders Go for Ghanese Gold Play Called Golden Star; Plus Updates on Three Energy Stocks

By Michael Brush
Exclusively for InvestorIdeas.com
October 05, 2006

If you are a gold bug why should you be praying for rain in Ghana? Because water reservoirs are low in this West African country, and that’s cut electrical power which has forced gold mining companies to reduce production.

That’s one reason investors who hold Golden Star Resources (GSS) have been in pain of late. Tiny Golden Star holds large chunks of land it what’s known as the Ashanti Trend in Ghana, a region long known for its abundant gold resources. From recent highs above $3.75 in May, Golden Star has tanked to below $2.50 – a 33% decline.

Down here the stock looks cheap. It has a price to book ratio of 1.2, compared to levels twice that or more at many mining companies.

That’s probably one reason insiders recently picked up $275,000 worth of the stock. Buyers included chief executive Peter Bradford, who spends most of his time with feet on the ground in Ghana – better to manage progress. (Golden Star is based in Colorado.) Bradford alone plowed $225,000 into the stock. Insiders bought at prices between $2.24 and $2.74 in late September.

Over the next several months or so, Golden Star will likely expand its processing capabilities to handle different types of ore. This plus some other changes could more than double 2005 production of 200,000 ounces to over 500,000 ounces in 2007.

That’s the game plan. The problem is Golden Star has had problems keeping promises on matters like earnings and costs, not to mention the quality of mines.

So this stock is now the proverbial “show me” story.

Normally “show me” stories are risky. But when insiders plow a substantial amount of money into a stock, it tips the balance in favor of success.

That’s what we have here. Gun-shy analysts and investors are cautious, while insiders put money into the stock on a significant dip. Typically, these kinds of situations work out on favor of investors who are long.

Golden Star’s main operating mines in Ghana are called Bogoso, Prestea, Wassa and the Prestea Underground. They are all in southern Ghana. Golden Star has proven and probable gold reserves of 3.8 million ounces and “indicated” gold resources of 3.62 million ounces.

Show Me

Despite its potential, Golden Star has several strikes against it. These are all pretty well known, so I’d guess they are priced in to the stock. But it’s always good to know what you’re up against when you are long a stock. Here’s a look.

• Poor track record. Golden Star has a record of missing expectations because of disappointing operating results and development delays. Its Wassa mine has operated below expectations since its start-up in April 2005.


• Illegal mining. Illegal miners in Ghana go so far as to carry out their own blasting operations which, of course, disrupt Golden Stars’ own efforts, delaying projects. Unlike Venezuela, where the government has aggressively moved out illegal miners, Ghana doesn’t seem to be doing as much.


• Funding needs. Expansion projects are costly and Golden Star may need to raise more money. This could be dilutive to existing shareholders.


• Power shortages. They’ve disrupted mining operations and exploration, as well as progress on the development of a new processing plant which would help Golden Star a lot. A nearby hydroelectric station in Ghana is operating at below capacity because of low reservoir levels. It’s recently rained a lot in Ghana, and utility officials are supposed to be meeting now to decide if they can up power production. Golden Star has diesel-powered generators but these cost about five times as much.

Lukewarm rating

Because of challenges like these, CIBC World Markets analyst Brad Humphrey recently cut his price target on this stock to $4.05 from $4.85, maintaining a lukewarm “sector perform” rating.

He says investors now have a "wait and see" attitude, and it will take several quarters of meeting expectations before this changes. “In the meantime, we do not expect Golden Star's shares to outperform its peers,” writes Humphrey in a recent research report.

Potential Catalysts

Insiders clearly disagree, given their purchases. Here’s a look at some of the potential catalysts on the horizon, besides a return to normal power generation.

• 
  Bogoso sulfide expansion. If you want to skip the science, it’s enough to know that Golden Star’s plant at its Bogoso site can’t process more than half the ore that comes up. They are putting in a new plant that can help get the job done, which could increase overall gold production to 500,000 ounces next year.

Now for a more technical description. Gold ore reserves at Golden Star’s Bogoso and Prestea mines come in two types. One kind contains no sulfides, or it has sulfides that have been naturally oxidized. These are called “oxide” or “non-refractory” ores. These ores can be extracted by what’s called “carbon-in-leach” processing. In this process, cyanide is used to leach out gold which is then absorbed by carbon.

In contrast, "refractory" ores contain un-oxidized sulfide which traps gold. These ores cannot be processed by “carbon-in-leach” plants, like the plants Golden Star has at Bogoso. So Golden Star is adding a bio-oxidation plant to help get the job done. Bio-oxidation is a process that uses bacteria to oxidize refractory sulfide ore so it can go through carbon-in-leach processing. See? That wasn’t so hard.

• Feasibility studies. Other catalysts include two feasibility studies for the Prestea Underground and the Hwini-Butre and Benso projects. These are expected before the end of the year. Initial tests have shown decent potential.


• Wassa mine improvements. This mine has been one of the disappointments that has investors concerned. But higher grade ores may be coming up from other pits near this mine.


• Takeover bait. Down at these levels, big, resource-hungry players in gold may be eyeing Golden Star as a takeover candidate.

Gold prices

Small swings in the price of gold can have a dramatic impact on earnings at mining companies. Fortunately for Golden Star, the outlook for gold is bullish.

As a metal, gold seems like a mere commodity. But sophisticated observers know gold has held a power psychological grip on investors and non-investors alike for centuries – as a source of beauty as well as a store of value in uncertain times.

Historically, gold has been the default currency when economic systems and fiat currencies go haywire. Rightly or wrongly, that hasn’t changed. So with all of the geopolitical uncertainty in the world, demand for gold should stay strong from “gold bugs” who seek comfort and security in bullion.

These forces should support demand as well:

• A rising middle class in India, where people, like elsewhere in the world, have a fascination for gold jewelry. Wedding season is around the corner in India which -- believe it or not -- has some gold analyst bullish on demand for bullion.


• A weakening dollar which will continue to fall. This helps gold because it’s priced in dollars. So as the dollar drops, it looks cheaper to many buyers who operate in non-dollar currencies. So they buy more gold.


• Signs of inflation, which makes wealthy investors worry that their money will lose value. Gold has acted as a classic hedge against inflation in the past.
  Declining gold sales by central banks around the world, which will reduce supply according to some analysts.


• Where does all this leave Golden Star? “It’s one of the cheapest gold stocks out there,” says Thomas Winmill who manages the Midas Fund (MIDSX), one of the top-performing precious metals funds. He thinks Golden Star is among gold stocks with the least downside and the biggest potential upside. He has long exposure to the stock.

Follow up

Insiders were recently adding to positions at the following stocks featured at Insiders Corner. They have been buying at:

Abraxas Petroleum (ABP) click here
Oil field services company Weatherford International (WFT) click here
Goodrich Petroleum (GDP) click here

Finally, we have to award an honorary badge of courage to insiders at homebuilder Tarragon (TARR). With greater exposure to urban real estate markets, Tarragon supposedly has protection against the dramatic weakness in housing markets across the country.

Insiders sure think so. Since the middle of May, they have stubbornly continued to buy as the stock steadily eroded from $16.75 to recent levels of $9.73. With most of their purchases under water, insiders kept up their buying in late September. Most of their purchases have been poor buy signals, but you have to admire their persistence. Who knows – the most recent purchases at $9.73 may have marked the bottom for the stock.

The bottom line: Gold has pulled back dramatically since highs in May. But the bull run is not over -- for all the reasons listed above and more. Buying bullion is the safest bet on higher gold prices since you don’t have to worry about managers mucking up, says commodities expert and adventure capitalist Jim Rogers, author of Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market. Despite Jim’s admonition, I think you’re likely to get more upside – albeit with additional risk – in a beaten-down gold company where insiders are buying, like Golden Star. I’d buy right here below $2.50.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

Join a Veteran Value Investor for a Taste of Her Own Cooking

By Michael Brush
Exclusively for InvestorIdeas.com
September 07, 2006

In your hunt for market-beating stocks, wouldn’t it be nice to have a peek at the personal holdings of a successful money manager?

Thanks to the rules that make insiders report their trades, you can do just that.

The money manager is Susan Byrne, chief investment officer at Westwood Holdings Group (WHG). One of her biggest purchases recently for her own portfolio: $531,000 worth of her company’s stock.

As part of her job at her Dallas-based firm, Byrne manages the Westwood Equity AAA fund (WESWX). It’s a large-cap value fund which was up 8.46% for the year as of the end of August, or 2.93 percentage points better than the S&P 500. The fund also beat its category by about three percentage points over the past three years -- with annualized returns of about 16%, according to Morningstar.

Byrne and her team show other signs of success. Two new Westwood Holdings mutual funds for institutional investors are besting competitors so far this year by 5.2 percentage points and 2.3 percentage points, says Morningstar. They are the WHG SMidCap (WHGMX) and WHG Income Opportunity (WHGIX) funds -- up 9.6% and 6.7%, respectively.

Returns like these helped Westwood pull in assets at a healthy clip last quarter. Average assets advanced 29% to $5.4 billion. That asset growth drove a 30% increase in advisory fees to $4.3 million. Overall revenue grew by 26%.

Earnings per share, however, advanced only 5% to 18 cents because expenses grew at a rapid clip, too. But much of that expense growth came in the form of restricted stock – including a healthy dollop for Byrne.

That creates a non cash expense which erodes earnings. But it doesn’t impact operating cash flow -- perhaps a better measure of performance. Operating cash flow advanced an impressive 58% to $2.35 million in the second quarter.

This performance helps explain recent insider interest in the stock. But something else may be at work.

Compelling buy signal

In her funds, Byrne likes to invest in value names that produce healthy quarterly surprises not fully recognized by Wall Street. That investing strategy may also be a big part of the reason why Byrne was recently filling up on her own cooking.

Her company’s impressive 58% jump in quarterly cash flow announced at the end of July has moved Westwood stock up a scant 50 cents to around $19. After quarterly earnings were announced, Byrne bought $531,000 worth of Westwood stock, or 27,750 shares, at an average price of $19.14.

The purchases are a compelling buy signal for at least two reasons.

• First, Byrne has served as chairman and chief investment officer of Westwood Management since 1983. So she knows the company well.
  Second, she already has a lot of exposure to the stock. She had 666,000 shares as of April. On top of that, she has an annual restricted stock grant of 50,000 shares a year for six years, starting this year.


• As an investment manager, Byrne knows it’s wise to diversify. Yet despite this exposure, she plowed about a third of her salary and bonus into open market purchases of Westwood stock in August. That’s either conviction or carelessness. Given Byrne’s years of experience in the markets, I’d bet it’s the former.

Besides Byrne, a director bought $192,000 worth of stock for $19.20 in early August.

Under the radar

Westwood is not a high-profile name in money management like Fidelity or Vanguard. And you are not likely to hear it hyped on the financial shows any time soon.

The reason: Westwood is tiny with a market cap of just $120 million. Plus it has zero sell-side analyst coverage -- and it probably won’t have any soon. That’s because the company throws off a lot of cash and it has little in the way of capital needs. So it’s not a prime potential client for the investment bankers on the other side of the Chinese walls from the analysts at the Wall Street brokerages.

However, if you need outside confirmation that this asset manager makes sense as an investment, just look who is one of the biggest owners: Value ace Marty Whitman at Third Avenue Value. His firm owned 17% of the stock as of the end of June.

The risks

If the worry warts are right and we see a sharp downturn in the economy and the markets, asset management firms like Westwood may suffer as investors throw in the towel and pull money out of the market. Westwood finance chief William Hardcastle responds that the firm serves a lot of institutional investors like pension fund managers. They are more likely to maintain exposure to stocks even in a downturn. So assets may not see excessive shrinkage in a market tumble.

Next, while this looks like the proverbial “undiscovered gem” you always hear about, the problem with undiscovered gems is that they can remain undiscovered. So they don’t move up. Westwood’s game plan for promoting its stock is to continue to rack up good growth in assets and cash flow – and let the market notice. That’s fine as a strategy. But if you are an investor, just remember it may be a while before the market actually catches on. Your risk is that you get bored and sell the stock before you see decent gains.

The bottom line: Like the insiders, I think Westwood is a buy right here at around $19. But like the insiders, you need to buy for the long term with a good amount of patience. There’s nothing wrong with that – it’s the essence of investing. Byrne herself moved into energy stocks in her large cap value fund too early, in 2001. The bet finally paid off in the past two years. You may have a similar wait with this stock – but at least you will earn a nice 3.1% annual dividend in the meantime. As an added bonus, shareholders of record as of September 15 get a recently-approved special dividend of 85 cents a share, payable on October 2. You can chalk that up to the 58% growth in cash flow plus $21 million in cash on the balance sheet – or over $3.30 a share.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

Go East With CanWest for Canadian Oil Sands Riches

By Michael Brush
Exclusively for InvestorIdeas.com
August 17, 2006

Stretching through the western Canadian province of Alberta is a 105 million-year-old geological structure known as the McMurray formation that may likely grant President George W. Bush one of his biggest wishes: Reduced dependence on Middle Eastern oil in the coming decades.

The McMurray formation contains rich deposits of bitumen, a tar-like substance once used by indigenous Aboriginal people to water-proof canoes.

These days, bitumen can be extracted from oil sands, refined into crude oil and processed into gasoline and diesel fuels. It takes about two tons of oil sands to produce one barrel of oil. But with oil up in the $75-a-barrel range, it’s worth it.

Oddly, even though the McMurray formation stretches eastward into Alberta’s neighboring province of Saskatchewan, oil sands production stops abruptly at the border. This is strange because there is no reason to think oil sands don’t spread over into Saskatchewan. The question is: Are the deposits rich enough to be commercially viable?

No one knows for sure.

But a small, Canadian energy company named CanWest Petroleum (CWPC) is well on the way to finding out. It owns the rights to explore about a half million acres in Saskatchewan. And while initial tests can be described as “promising” at best, insiders at this tiny company seem to think they already know what’s in store.

Since July 5, CanWest insiders, including a director and chief executive Christopher Hawkins, have purchased $2.5 million worth of stock at an average price of $4.88 per share -- or just above recent prices of $4.40.

That’s a convincing wager. But before you plunk any money down on this unconventional Canadian oil sands play, just remember it’s a risky bet. After all, if it were a sure thing, the stock would not a bulletin board listing trading at $4.40. So don’t bet too much.

There are, however, several reasons to think CanWest will strike it rich and the wager will pay off.

• A good portion of CanWest’s holdings are right next door to several successful projects in northern Alberta, notably one called Firebag, developed by Suncor Energy (SU).



• Initial results from CanWest testing looks positive, says Murray Gingras, an associate professor at the Department of Earth and Atmospheric Sciences at the University of Alberta, who has been following the company and exploration in the region.

In the best sections of CanWest holdings drilled so far, the company has found bitumen saturation reaching as high as 18%. “Mineable grade is above 8%, and really good grade is 14% to 15%,” says Gingras. CanWest has also found bitumen spanning an average of 62 feet vertically, and as much as 91 feet in another hole.

“Those are very promising numbers,” says Gingras. “Firebag has numbers like that for thicknesses, and it is one of the sweeter spots in the McMurray formation. If I were the president of the company I would be excited, too. The chances that they have an exploitable resource are good.”

Next, however, the company has to determine how wide the deposits are. And that’s one of the wild cards, says Gingras. But CanWest has permission to drill 100 holes this winter, and that may put doubts to rest. “We will be pretty certain by this time this year,” Hopkins told me in an interview last week.

How big could this play be? CanWest estimates that several blocks in one area explored so far may contain 250 million barrels of oil – though not necessarily commercially viable. The area in question is less than a half a percent of the land CanWest has permits to prove up.

But here’s another way to look at it. Experts believe that Alberta’s oil sands region has enough bitumen to produce over 300 billion barrels of oil. The Saskatchewan land that Hopkins thinks could be exploitable make up about 20%-30% of the Alberta oil sands. So a simple analysis suggests Saskatchewan could have 60 billion barrels of oil in the form of tar sands.

These estimates sound far fetched, and they could be. But keep in mind that Hopkins has years of experience in the business with companies like Suncor and Synenco Energy (SYN.TO).

A few housekeeping notes: CanWest Petroleum recently combined with a subsidiary called Oilsands Quest, and it will probably soon take on that name. Next, CanWest is listed in Canada, but it will likely be listed on a major U.S. exchange soon.

Risks

CanWest Petroleum blew through $52.6 million in the fiscal year ending in April, and it will probably need to raise more capital. It says it has enough to fund the upcoming winter round of exploration. But that could change, and dilutive financing could be on the way.

If the price of oil tanks, that would make Canadian oil sands most valuable as a way to water-proof canoes, once again. But Raymond James analyst John Mawdsley doesn’t think oil prices will retreat much.

He cites a dearth of excess capacity, the lack of any big discoveries in recent years, a looming peak in global oil production, and increasing political instability in oil-producing regions. “We believe these factors will prevent oil prices from dropping, even in a recession,” he says. On top of that, growth in demand from developing economies should keep a bid under oil.

The bottom line: Of course the biggest risk is that Saskatchewan is a wash out, and CanWest goes bust. That’s a possible outcome, so don’t bet too much on this name. But insiders – who have the best look at the core samples – are betting the other way. So it makes sense to follow them and buy CanWest Petroleum right here in the pull back from $8 in early May.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

Insiders Fill Up on Water Shortage Play

By Michael Brush
July 20, 2006

While potential shortages of energy grab the headlines every day, it’s actually a shortage of another essential ingredient of life that may get us in the end: drinkable water.

Photos of the earth from the recent space shuttle trip reminded us that our blue planet is awash in water. But very little is available to drink. About 97% of it contains salt. Two thirds of the remaining 3% is locked up in polar ice caps. That leaves about 1% of all the earth’s water for us -- and much of that is polluted.

The upshot: There are now shortages of fresh water on every continent, says Brean Murray, Carret & Co. analyst Michael Gaugler. The Southwestern region of the U.S., of course, has had problems for years. In China and the Middle East big projects are under way to create new supplies. Parts of Africa and India have shortages that create ongoing crop failure and mortalities.

These trends have sparked investor interest in water-related stocks -- or the companies that not only sell water but also supply the equipment that purifies it and desalinates it, and pipes it to your kitchen.

So it should be no surprise that insiders were buying heavily when some of the stock of one of the biggest water infrastructure equipment companies, or Mueller Water Products (MWA), was spun out of its parent company. In the first ten days of June, they purchased $3.4 million worth of Mueller stock for prices between $15.26 and $16.

Mueller was only taken over last year by its parent – the conglomerate Walter Industries (WLT). But now Walter Industries has reversed course in an effort to increase shareholder value by hiving off various divisions.

Mueller, as a leading supplier of water infrastructure equipment and a pure play in this space, should benefit from the following big-picture trends.

• Water scarcity. Shortages of fresh water are a major problem in both developed and developing countries. Companies that sell equipment used to transmit or purify water should benefit.



• Infrastructure build out. The pipes, valves and pumps that transport water throughout many parts of the U.S. are over a hundred years old and in bad shape. So a major replacement cycle lies ahead.

The Environmental Protection Agency (EPA) estimates that the U.S. will have to spend about $277 billion by 2019 on water infrastructure. (The Congressional Budget Office puts the number at $12.2 billion to $21.2 billion a year, which works out to about the same as the EPA estimates.)

Of that $277 billion, the EPA thinks transmission and distribution will take the lion’s share -- or $184 billion over the next two decades. Treatment is next on the list, with $53 billion in expected spending. That’s bad news for people who pay the water bills. But it’s good news for Mueller since these are two of its strong suits.

Abroad, developing countries like China are in the early stages building out their water infrastructure. Mueller doesn’t sell in China yet, but it’s working on it.

• Consolidation. There are about 54,000 water companies in the U.S. – many of them tiny, serving just a few thousand customers. They don’t have the money to upgrade their systems or meet tighter regulations being imposed by the EPA without increasing rates too much.

A better option may be to sell out to larger water companies that can deal with these challenges. These pressures will lead to a wave of consolations, says Gaugler, of Brean Murray, Carret. As the consolidation trend plays out, the infrastructure upgrade will kick in to higher gear.

Risks

Though Mueller stands to benefit from all these trends, there are near-term risks for the stock. Walter Industries still has to spin out 80% of Mueller shares. That will happen in the second half of this year. That could cause selling pressure since many investors simply sell stock that gets spun out to them.

Next, a little math suggests that speculators might be shorting Mueller stock and going long Walter Industries ahead of the spin out. Based on the value of Mueller stock trading in the open market right now, all of its shares together are worth about $2 billion. That leaves an implied value of $500 million to $700 million for the rest of Walter Industries, or about one third of its true value, estimates Gaugler.

If he’s right, speculators may be going long Walter Industries and shorting Mueller as a hedge – to make money in an arbitrage bet that Walter Industries will approach its true value.

All of this means that Mueller shares could become more volatile in the months ahead. But the level of insider buying in Mueller shares suggests the near-term volatility may be nothing to worry about in the long run.

Gaugler thinks that Mueller Water Products stock could trade up to $20 in a year from recent levels of $16.

The bottom line: That arbitrage play and the knee-jerk reaction of many investors to simply sell stocks that get spun out to them could put some downward pressure on Mueller shares in the months ahead. But we don’t really know that will happen. Meanwhile, the long term-trends and insider buying are compelling enough to suggest Mueller is a buy right here – despite the possible risk of some turbulence in the coming months.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

Potential Heart Attack Cure Could Reward Investors Big Time

By Michael Brush
July 06, 2006

When doctor Mark Hyman is out promoting his popular book “Ultraprevention : The 6-Week Plan That Will Make You Healthy for Life,” he likes to point out that inflammation is the scourge behind many of the main ailments that do us in.

Inflammation, of course, is our body’s reaction to problems like infection. It’s part of the healing process. But when it turns into a permanent condition lasting for years inside our arteries, it is the main culprit causing heart attack and stroke.

Hyman suggest diet and lifestyle changes to correct the problem. But an Alpharetta, GA-based biotech company called Atherogenics (AGIX) thinks it has a silver bullet – a drug that safely blocks inflammation in the arteries.

The stock market is not so sure. Since the start of the year, Atherogenics’ stock has declined to $13 from $21.

Down here, however, insiders have shown their confidence. They recently bought $850,000 worth of the stock for around $13. The giant pharmaceutical company AstraZeneca (AZN) is also a believer. At the end of last year it entered into a co-marketing deal in which it helps fund Atherogenics in exchange for a piece of the action later.

If the insiders are right and the compound ultimately makes it to market, investors who buy now will be amply rewarded. A.G. Edwards & Sons analyst Alexander Hittle estimates the market for the drug will be $2 billion by 2010, of which Atherogenics would get half. He thinks that kind of potential revenue could help propel the stock to $45 -- for a cool triple if you buy now.

The company has other irons in the fire – potential cures for other inflammation-related ailments like organ transplant rejection, rheumatoid arthritis and asthma. But for now it’s all about the silver bullet against the inflammation in our arteries that leads to heart attack and stroke.

That’s one reason why betting along with the insiders here is a risky venture. Brean Murray, Carret & Co. analyst Jonathan Aschoff, for example, thinks the drug will fail. That’s why he has a $2 price target on the stock – which would mean if you buy now you will lose most of your money.

I’d just take his warning as a reminder of the risk inherent in all biotech companies. Given the level of insider buying recently, I’d put a small amount of money in this stock for a potential three bagger.

Here’s a closer look.

Inflammation

Inflammation is the body’s normal reaction to fight infection, disease and injury. It generates signals that recruit leukocytes – which destroy infection and remove debris from the area around an injury. That’s all good. But when inflammation persists for years, the leukocytes that it continues to attract can worsen the inflammation and cause problems like atherosclerosis. Atherosclerosis leads to the buildup of plaque along the arteries which reduces or blocks blood flow – causing heart attack or stroke.

Atherogenics’ silver bullet, called AGI-1067, works by blocking proteins that make genes produce other proteins that cause the inflammation. The compound may also block oxidants that cause inflammation. It does all this without compromising the body's ability to protect itself against infection, says the company.

The ultimate test

A phase III study of AGI-1067 launched in June 2003 may be proving the company right. It is known as Aggressive Reduction of Inflammation Stops Events (ARISE). Researchers are giving AGI-1067 to a sample of people at high risk for coronary disease, heart attack and stroke – hoping for a lower-than-expected number of negative outcomes like these.

While the study won’t close until August, so far the numbers look good. Fewer people than expected are having these problems. It’s hard to know just yet whether this is due to any positive effects from AGI-1067 or other factors like better care from their doctors.

In a recent note on Atherogenics, Canaccord Adams analyst Joseph Pantginis, said he thinks it’s because the drug works. A.G. Edwards & Sons analyst Hittle has the same view.

“We continue to recommend purchase of Atherogenics shares for the truly speculative investor who has the capacity to withstand both ongoing volatility and the possibility of near total loss of capital should the ARISE trial fail,” he says. “In exchange for running these risks, should the ARISE trial succeed the upside potential of a drug that adds meaningful benefit on top of the current standard of care in cardiovascular medicine is vast.”

But Brean Murray, Carret & Co. analyst Aschoff thinks other factors could explain the positive results -- like the use by participants of anti-cholesterol drugs, beta blockers and aspirin. That’s why he expects the stock to be a wash out.

The bottom line: We probably won’t know who is right until the start of next year when the company releases definitive results. Before then, I’d place a small bet on a positive outcome, given the recent insider buying and the potential upside for you if they are right.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

Weight Loss Website Could Fatten Profits, Plus Two Stocks Where Insiders are Buying the Blow Up

By Michael Brush
June 29, 2006

Unlike many of the obese people that eDiets.com (DIET) tries to help, the company’s shares have lost a lot of heft lately.

Since earlier this year, the stock of this thinly traded dieting website founded in the early days of the dot com era has been nearly sliced in half – falling to $4.70 from $8.60.

It’s easy to see why.

• The company is in the midst of management turmoil with one CEO departing – apparently because of a disagreement with the board on a strategy shift -- and another one not yet in place.


• It recently pushed back the launch of an “infomercial” that was supposed to help save the day by spreading the word about eDiet.com’s move into delivery of healthy food to dieters.


• The website makes money by selling subscriptions to get information like meal and fitness plans and dieting tips which presumably you can find elsewhere, and subscriber churn is high since people tend to stay on diets only briefly.

Insiders still buying


Given these kinds of negatives, why would insiders buy? Because they belong to a hedge fund that is taking a huge position in the company and putting a director on the board to oversee changes that should make the stock go up.

The hedge fund is Prides Capital and the board member is Kevin Richardson.

Here is the plan.

• 
  That infomercial which was supposed to hit the airwaves recently will most likely be pushed back to late summer. Managers apparently didn’t think it got the message across that eDiet.com’s delivered meals are fresher and better than those of competitors. If shareholders who buy now ever make any money out of the stock, it’ll be because largely this meal delivery system takes off.

Canaccord Adams analyst Scott Van Winkle estimates that if eDiets.com penetrates just 5% of its subscriber base, or 10,000 customers, it would bring in $91 million a year. That would nearly triple current revenue. The company’s delivered meals go for around $20 to $35 a day. Van Winkle thinks the meal delivery service will generate $7 million in revenue this year and $13 million in 2007.

The company has a database of five million email subscribers, and between one million and two million visitors go to the website each month. The company should be able to leverage this user base through activities like advertising, licensing and e-commerce.

The company recently purchased a profitable business called Nutrio, which provides online wellness plans to corporations.

There’s no shortage of potential customers. About two-thirds of Americans are overweight and 30% of U.S. adults – more than 60 million people -- are obese. About a third of the people in the U.S., or 71 million people, are on diets.
“The company is dramatically expanding its ability to monetize its subscriber base, in our opinion, which should ultimately drive higher revenue and earnings,” says Van Winkle. He has a $7.50 price target on the stock. It recently sold for $4.70.

Buying the blow up

Two companies recently saw significant insider buying after their shares blew up because of bad news.

• Shares of Jos. A Bank Clothiers (JOSB) have fallen nearly 40% in June due to lowered earnings expectations and a sense among some investors that the company took too long to reveal a negative shift in the mix of product sales that began playing out back in February or March. Insiders recently bought around $150,000 worth of stock for about $24. Ryan Beck & Co. analyst Margaret Whitfield recently upped her rating on the stock. She has a price target of $35.



• Shares of Actuant (ATU), which makes tools components and motion control systems used in industry, also broke down in June, slipping to $48 from nearly $67 in May. The break down in June came after Actuant released earnings. “Management, in its attempt for transparency, seemed to focus on everything that was negative versus the many positive aspects of its business in our view,” says Wachovia Capital Markets analyst Wendy Caplan. She believes “fundamentals remain intact and that investors should be aggressively buying the depressed shares.” Caplan has a 12-18 month price target of $64..

The bottom line: Given the ongoing turmoil in the market, it’s tough to pull the trigger and buy stocks. But if you are a long-term investor, going along with management and buying shares on these kinds of pullbacks like you see in these three stocks should bring decent profits.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

Five More Stocks Insiders Like in the Current Weakness

By Michael Brush
June 01, 2006

Is it over yet?

Judging by the dramatic pullback in most stocks Tuesday, there’s still more to go on the downside for stocks – especially economically sensitive names that do worse when economic growth is lousy.

These are some of the stocks investors are selling the hardest.

Investors are concerned that economic growth is slowing, or else it is too hot which will mean central banks have to continue to raise interest rates and kill growth, anyway. You really can’t have it both ways. But market observers are in fact arguing both sides – which suggests the current market weakness is irrational.

I’m still in the camp that says there is further decent economic growth ahead. Insiders at many economically sensitive companies seem to agree because they keep buying in the current weakness. Here’s a look at five more, as a follow up to last week’s Corner on the same theme (click here).

Two energy plays

If the U.S. and global economy were really about to slow down, you’d expect energy prices to cool off. Energy company insiders aren’t buying it.

Chesapeake Energy (CHK) chairman and chief executive Aubrey McClendon plunked down $11.9 million to buy shares in his company in the current sell off. He bought shares for $28.35 to $31.15 between May 16 and May 22.

Chesapeake, the second largest independent producer of natural gas in the U.S. after Devon Energy (DVN), has spent over $7 billion during the past seven years building an impressive base of natural gas reserves. At the end of March it had enough proved reserves to support a net asset value per share of $55, assuming natural gas prices of $8 per MCF. The stock recently sold for about $30.

McClendon also has a great record as an insider. On average, his stock has gone up 55% in the six months after he buys, according to Thomson Financial. The stock has practically doubled since we first featured Chesapeake here because of strong insider buying in January 2005 (click here). McClendon’s recent buying tells me you should expect much more upside from this stock.

Insiders have also been taking advantage of the current weakness to buy more shares of Petrohawk Energy (HAWK), another oil and gas company with assets in and around Texas and Louisiana. The company has been growing rapidly through acquisition. Like Chesapeake Energy, Petrohawk has oil reserves, but it is mainly a natural gas play.

Two titanium plays

NL Industries (NL) and Titanium Metals (TIE) are part of a complex constellation of companies controlled by titanium titan Harold C. Simmons.

NL Industries, through its subsidiary CompX International, makes precision ball bearing slides, ergonomic computer support systems and tumbler locks, among other things. NL also owns a significant interest in Kronos Worldwide (KRO) which makes titanium dioxide pigments used to brighten coatings, plastics and paper.

Titanium Metals produces a variety of titanium products for aerospace, industrial and military uses.

Both companies are essentially controlled by Simmons, who owns them through a complex web of trusts and companies called Contran and Valhi (VHI).

Shares of both NL Industries and Titanium Metals are down dramatically in the current market weakness. NL is down also because it used to make lead pigments used in paint, and now it’s the target of lawsuits by people claiming personal injury from the lead.

But the weakness in these two stocks doesn’t bother Simmons. He has recently been buying shares of both NL Industries and Titanium Metals at around current levels. He’s got an excellent track record, according to Thomson Financial. Stocks he buys inside his constellation of holdings have gained anywhere from 32% to 176% six months after he buys, during the past four years.

Banking on computer systems

Shares of Jack Henry & Associates (JKHY) were hit by a double whammy in May. Not only is the overall market weak, but Jack Henry – which provides computers systems for financial institutions – missed estimates a few days before the overall market turned sour on May 11.

The stock has fallen to under $19 from above $23. Interestingly, insiders were selling just before the fall for around $23. But now a different set is buying at around $19 n the pullback.

The bottom line: If you think the economy still has life, it will pay to follow insiders in these economically sensitive names. Insiders have also been buying more in two of the stocks mentioned in last week’s Insiders Corner: GenTek (GETI) and A. Schulman (SHLM) – confirming the bullish case for both of these stocks.

Disclaimer

At the time of publication, Michael Brush had long exposure to NL Industries and Titanium Metals. Mr. Brush is an independent columnist for this web site.

For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

Complete Your Energy Stock Portfolio With This IPO

Given the strength of energy stocks for the past two years, it’s no wonder companies in the sector are rushing to come public and take full advantage of the exuberance.

That’s the cynic’s view, and there may be something to that.

But a savvy investor watches the energy sector initial public offerings (IPO) to spot the ones where insiders are buying the most, and considers going along with them to profit from further strength in the group, instead of giving in to cynicism.

We saw a great example of insider buying at an energy sector IPO recently at Complete Production Services (CPX), a Houston, TX-based energy field services company.

Of course, you have to believe that energy prices will stay firm to follow insiders here. I believe energy prices will stay high -- as I am in the camp that says demand from India and China and solid overall global growth will continue to support energy prices.

Another factor is the unease and political risk in several energy producing countries like Nigeria, Venezuela and the Middle East itself (http://moneycentral.msn.com/content/P71425.asp). Unfortunately, the price of oil includes a several dollar “terror premium” that probably isn’t going away any time soon.

If you agree that high energy prices are here to stay for awhile, then you might do well to join insiders in buying shares of Complete Production Services.

The Full Monty

This energy field services company came public on April 21 just below $27.50. Within a few days, insiders registered $4.5 million worth of purchases at $24. Ok, they got a great deal, since the stock has never actually traded as low as $24. Nevertheless, that’s a sizable amount of buying that shows a solid vote of confidence.

As the name suggests, Complete Production Services offers a full range of energy services, from drilling through closing up a well down after it runs dry. The company operates throughout the Rocky Mountain region, and in Texas, Oklahoma, Louisiana, Arkansas, Kansas, western Canada and Mexico.

Complete Production Services has at least three factors working in its favor.

* Maturing energy fields. Conventional North American oil and gas reservoirs are maturing and production rates are dropping off. So energy companies have to drill more wells, just to stay even. That means more work for Complete Production Services.

* High-tech solutions. Energy companies are turning to unconventional resources since the easy pickings are scarce. This means exploiting energy in tricky formations like “tight sands” which are rock structures that are not very porous; shale, or fine-grained sedimentary rock; and coal seams that contain coal bed methane. To go after these kinds of resources, energy companies have to use more sophisticated technology and engineering. So they turn to specialized energy services companies like Complete Production Services, which has the right stuff.

* Local guidance. But to know exactly what kind of equipment and techniques work best, it helps to consult locals who understand the turf. “Our local and regional businesses, some of which have been operating for more than 50 years, provide us with a significant advantage over many of our competitors,” says Complete Production Services. They have extensive expertise in the local geological basin, and they also have long-term relationships with many customers.

The bottom line: Demand for energy field services is so tight and the insider buying in this stock was so big, I believe this company is a buy right here. But the stock has been volatile since it came out – which is typical of an IPO – so it will pay to be patient or use limit orders to buy.

Disclaimer

At the time of publication, Michael Brush owned shares of Complete Production Services. Mr. Brush is an independent columnist for this web site.

For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

A Natural Hedge Against the High Cost of Filling Your Tank

Since I wrote a column on ethanol a month ago (http://moneycentral.msn.com/content/P148882.asp), ethanol stocks haven’t looked back. They’ve continued a sharp ascent that began early this year when President George Bush touted ethanol as a way to reduce our oil dependency.

More recently, ethanol got a boost as a replacement for the additive methyl tertiary butyl ether (MTBE), which until recently was used to make gasoline burn cleaner. The additive may cause cancer, and Congress has declined to offer refiners protection from legal liabilities from the use of MTBE.

For a quick look at charts showing the impressive strength of most of the Ethanol plays, click here (http://rampantspeculations.blogspot.com/).

These kinds of moves have many investors wondering, is it too late to buy?

We got an answer of sorts last week when an insider at Green Plains Renewable Energy (GPRE) bought shares of his company – which is building ethanol plants. It wasn’t a huge purchase. The Great Plains director bought $63,000 worth at $42.17.

But given how much exposure he already has to the ethanol industry and how much the stock has gone up since his company’s initial public offering in March, we will take it as a buy signal nevertheless.

On the surface, it’s pretty easy to guess why he bought the shares. Green Plains Renewable Energy should build at least two ethanol plants in Iowa which could be quite profitable – given the price of gasoline. How profitable? We’ll get to that in a moment, but first a little background.

A Quick Overview

In Brazil, they make ethanol from sugar cane. But here in North America we typically use corn. The corn is first ground into flour and put in a tank with water and enzymes to break down the starch. Next, the mash is mixed with yeast in fermenting tanks. It then gets distilled, and voila! You have “grain alcohol” – exactly the same stuff that may have been responsible for at least one night you’d rather forget in college. (Ethanol makers put in additives at this point, which make it undrinkable.)

A byproduct of this process is “distiller’s grain,” a mash that’s used as animal feed. In its wet form, distiller’s grain only lasts a few days, depending on how hot it is. So unless there’s farm nearby, ethanol makers have to dry the stuff out so it can be stored and shipped.

This matters to investors, because as much as a third of the cost of producing ethanol can come from this drying process. So as an investor, give extra points to companies located close to farms – like Green Plains Renewable Energy and Pacific Ethanol (PEIX), in California. Green Plains Renewable Energy has an edge here because it’s plants will be located in Iowa, so it won’t have to pay much to have corn shipped to its plants.

We typically think of ethanol as an octane enhancer or something used to stretch a gallon of gas. But it’s better to look at ethanol as “gasoline made from corn.” It’s entirely possible that one day lots of cars will run on near-pure ethanol, a substance called E-85 which is a blend of gasoline and around 70% to 85% ethanol. That’s the case in Brazil. Here on this continent, we just need more cars that use the stuff, and more service stations that offer it – no short order.

Green Plains Renewable Energy

For openers, Green Plains Renewable Energy plans to build an ethanol plant in Shenandoah, Iowa for about $83 million. The plant will produce around 50 million gallons per year. Down the road, Green Plains Renewable Energy plans to build at least one more plant, if not more.

In theory, these plants will be profitable, assuming gasoline prices stay high. At roughly the current prices of corn and the natural gas used to cook it, ethanol costs about $1.10 per gallon to make. With gas as high as it is, ethanol recently sold for spot market prices of about $2.80 per gallon.

But will Green Plains earn enough to justify its current stock price? I did some back of the envelope calculations to take a guess – and I think it will. First, I looked at several private companies that already run similar sized ethanol plants, to see how they are doing. (Even though they are private companies, they report results to the Securities and Exchange Commission.)

Here are the key takeaways. A privately-held ethanol producer called Husker Ag owns and operates a plant near Plainview, Nebraska producing about 25 million gallons of ethanol per year and over 160,000 tons of animal feed. Last year it had net income of $10 million on sales of $47.2 million. This shows that these plants can get pretty decent profit margins of nearly 20%.

Another company called Little Sioux Corn Processors manages a 40 million to 50 million gallon plant near Marcus, Iowa – the size Great Plains has in mind for its first plant. For the last quarter of 2005, Little Sioux reported net income of $4.2 million on $23 million in revenue. That works out to $16 million a year. Great Plains has about four million shares. So Little Sioux’s results suggest Great Plains could earn $4 per share – all things being equal – on its first plant. Put a multiple of 15 times earnings on that, and you have a $60 stock price – well above the recent price of $37.50 for Great Plains shares.

Risks

To be sure, these are just rough calculations. What’s worse, predicting the profitability of ethanol production is not so easy.

Here’s why. Little Sioux Corn Processors estimates that corn will account for around 46% of its production costs next year, and 18% will be from natural gas. The prices of both these commodities bounce around a lot, making it tough to get a grip on how profitable an ethanol plant will be.

For example, Little Sioux’s income shot up 36% to $7 million in the last quarter of 2005 compared to $5.2 million in the same quarter the year before. Why? Because costs were lower. Investors pay lower prices for stocks of companies that have that kind of variability in their results.

Hedging machines

To avoid these kinds of swings, ethanol producers are veritable hedging machines. Managers are constantly trying to outwit the market – buying corn and natural gas futures to lock in the cost of next year’s supply, or selling their ethanol forward if they think prices will drop.

You can’t blame them for doing this. But it means that when you own shares in an ethanol company, it’s a bit like owning stock in a Wall Street brokerage with an active trading desk. Results can be volatile, depending on whether managers put on the right hedge or not.

Here’s an example of how wild it can get. A privately-held ethanol producer named Golden Grain Energy, which has a 40 million gallon ethanol plant near Mason City, Iowa, had a great quarter for the three months ending July 31 last year. It earned $6.2 million in net income on $19.8 million in revenue.

But for the quarter ending January 31, 2006, the company barely broke even with just $386,000 in net income on $17.1 million in revenue. What happened? The company lost $4 million on an ethanol derivatives play that went bad. A broken pump shutting down production for a month also hurt.

Too much supply

Another risk -- given all the hoopla over ethanol – is that too much supply comes on line, hurting pricing. As of the end of last year, according to the Renewable Fuels Association, there were 95 ethanol plants in operation in the U.S. An additional 31 new plants and nine expansions were on the way. That will increase annual capacity by a third, to 5.8 billion gallons.

Will there really be enough demand, if this kind of growth continues? It all comes down to whether you think oil will remain in short supply – keeping gasoline prices up. Given the strength of demand from place like India and China, and the difficulty oil companies seem to have in coming up with new reserves, my bet is energy prices will stay high. But no one knows for sure.

The bottom line: Ethanol has been used as a fuel for cars since the days of Henry Ford, but it is still an “emerging” energy source, at least in North America. On top of that, Great Plains is an “emerging” company – having just come public a few months ago. These factors make Great Plains a risky play. On the other hand, it looks to me like ethanol is going to play a big role in solving our energy problems – even if a lot of people don’t realize it yet. So I’d buy Great Plains right here as a play on that trend. Just watch your position size and be prepared for some volatility.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

A Wireless Hookup for Your Portfolio

By Michael Brush
April 20, 2006

For years, pundits have wondered how the Internet and television will merge to form one home entertainment system in your living room. A tiny Fremont, Ca.-based company may have the answer – or at least a piece of it.

Pegasus Wireless (PGWC), whose top managers were behind the development of a wireless transmission system known as Wi-Fi, introduced a wireless connection device earlier this year that may do the trick. The device carries high-definition streaming video from your personal computer to your TV.

Known as the WiJET, this gadget is one of several wireless consumer electronics goodies Pegasus hopes to have in stores by Christmas. Others include a Wi-Fi based universal remote, and wireless stereo headphones. More cool wireless consumer electronics products are in the works. “We have a whole bunch of consumer devices that will be pretty neat,” says Pegasus Wireless president Jasper Knabb.

Will these products sell? After all, consumer electronics is a notoriously tough segment of retail -- where giants much larger than Pegasus duke it out through a combination of design breakthroughs and margin-crushing price concessions to the major retail chains.

Huge insider buying

Pegasus Wireless insiders sure seem to think they can pull it off. In the last seven months, insiders bought a whopping $14 million worth of stock. The buys include purchases in the $10 to $14 range -- or not far from where the stock recently changed hands.

Most of that buying has come from Knabb himself, a multimillionaire who sold his first business – a console game development company -- for $80 million when he was just 22.

Now in his late 30s, Knabb – along with other top managers at Pegasus – has one of the more unusual pay packages in corporate America. Knabb gets no salary. Instead, he received 1.2 million options with strike price of 32 cent a share, for his first two years of work.

Beyond that, he hopes to realize a big piece of his payoff through exposure to Pegasus stock – a major reason he has been buying.

Knabb is already ahead of the game. He bought $1 million dollars worth at $2, and $9.2 million worth at prices ranging from $7 to $9. The stock recently traded for $13.

It’s worth noting that many of these purchases weren’t your typical open market buys. Instead, they were linked to financing deals that helped fund acquisitions by Pegasus.

But we’ve seen many cases in the past year where insider buying linked to financing deals -- and initial public offerings -- served as an accurate bullish signal. Besides, Knabb says he is not done buying, despite the recent stock advance, because he believes so much growth lies ahead. “We are just getting started,” he says.

Other products

Besides devices that link computers to TVs, Pegasus makes several lines of wireless connection devices used to create outdoor wireless Internet hotspots and networks in the home and office. Other devices link computer networks in different buildings at schools or businesses. Pegasus products also connect computers to projectors for wireless PowerPoint slide shows.

Going against the grain

In the past several months, Pegasus has done a series of acquisitions that morphed it into a vertically-integrated business – the very kind of business model many companies have been running away from in the past few decades.

Pegasus has the intellectual property. But instead of outsourcing manufacturing, it purchased controlling stakes in plants in China and Taiwan. And to reach customers, Pegasus bought a controlling interest in AMAX Engineering based in Fremont, Ca. AMAX sells computer systems and networking devices. But Pegasus purchased the company for its customer base. “We picked up 160,000 accounts,” says Knabb.

A wild horse

In Greek mythology, Pegasus was a winged horse that was full of surprises. Once her head was cut off, and another horse sprang from her body. Pegasus was given as a gift, but promptly threw its new owner and rose to the heavens.

If you plan to own this stock, you should keep in mind that Pegasus, the company, lives up to its namesake. The stock more than doubled to trade above $15 in January from $6 in November. Then it pulled back to $8 this spring, and shot up over 35% to $13 this week – presumably on news the company would move to Nasdaq from the bulletin board.

Anyone who follows the insiders on Pegasus should be prepared for more volatility. After all, Pegasus now has a lot to deliver, to live up to its promise. It has a market cap of almost $1 billion. But it had sales of just $17 million in last quarter of 2005 – and most of that came from the AMAX Engineering purchase. That means the company has to expand a lot, to grow into an over-sized price to sales ratio of nearly 15.

Next, consumer electronics is a tough business where the huge retail chains squeeze every penny out of suppliers. The landscape is dominated by huge competitors. Success won’t come easy. Finally, ownership of manufacturing plants and distribution channels could leave Pegasus with stranded costs that hurt margins in a downturn.

The bottom line: The huge insider buying is a big lure with Pegasus – a strong enough signal to make the stock worth buying. Just watch your position size.

Disclaimer

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.

For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

Can You See Me Now? A Small Play on a Big Wireless Upgrade

By Michael Brush
April 13, 2006

When you watch a movie that’s even just a few years old these days, one thing stands out: The cell phones are just too darn big.

Wireless providers have done a great job of miniaturizing the handsets. Now for their next trick: Over the next few years, they hope to send movies themselves through those cell phones. They want to pipe other “multimedia” services through handhelds as well -- like music and interactive games.

But none of this will work unless the wireless providers can get the bugs out of their networks so that those annoying signal drops have gone the way of oversized cell phones.

After, with so many other places to catch a movie or sitcom, who is going to put up with disruptions in the latest episode of "Desperate Housewives" on a cell phone when you can see the show without hiccups over the Internet or on TV?

That’s where LCC International (LCCI) comes in. For years, this tiny Mclean, VA -based company has been advising wireless providers around the globe on the best way to design networks – and helped them install and maintain them, as well.

Now under the leadership of Dean Douglas, who took the helm last October, the company hopes to focus more on the higher-margin consulting work – just as wireless providers face their next big challenge of installing broadband pipes to accommodate new multimedia services.

Douglas brings experience in wireless technology garnered while working at a Cisco (CSCO)-Motorola (MOT) joint venture called Invisix. He also worked with the IBM Global Services division of International Business Machines (IBM).

Can you see me now?

“As the carriers begin to move into multimedia applications, they will need to start thinking about reliability,” says Douglas. “Network reliability is critical.” Douglas believes LCC International can draw on its deep bench of radio frequency engineering expertise to help the wireless companies hit the right levels of reliability.

The company has already worked on projects with high-profile players that needed enough networks reliable to carry entertainment. LCC International helped XM Satellite Radio Holdings (XMSR) design and build its satellite network. It has also already done work with Nextel and Cingular Wireless work on developing advanced networks.

But will LCC International continue to win deals as wireless providers rush to install broadband pipes so they can offer multimedia apps? I can’t say for sure, but insiders seem to think so. And that is always a good start. Since December insiders have purchased $220,000 worth of LCC International stock for prices between $2.95 and $3.28. But the lion’s share of the buying occurred in the $3.18 to $3.28 range, not too far below recent levels of $3.70.

To be sure, the company is tiny -- with a market cap of just $67 million. On the bright side, this means the company is off the radar screen for lots of investors. So there is plenty of money on the sidelines to come into this stock if the company really does catch the wave of coming upgrades at the wireless providers. LCC International still looks cheap with a price to sales ratio of just .46.

Meanwhile, the company has a decent amount of cash to tide it over while it changes direction. It recently had around $14 million in cash or 57 cents a share. The company also has a decent backlog of at least $79 million worth of business.

Big-picture trends

Here is a summary of some of the of the main sector trends that may drive growth for this company:

Wireless providers are looking to offer multimedia services like mobile TV and music, interactive games, voice over IP (VoIP), and multimedia messaging -- which allows wireless users to swap messages that combine text, image, sound and video. But to do so, they have to turn to technologies like 3G and WiMAX to get more high-capacity bandwidth. “The move to broadband and 3G will be a big shift for carriers and it will be a big thrust for our business,” says Douglas.

Wireless providers have consolidated in recent years, with Cingular Wireless and AT&T Wireless Services hooking up, as well as Sprint and Nextel. They are stretched by the demands that come from merging their businesses. So they are looking outside for help, says Douglas. “Consolidation presents huge opportunities because the carriers are constrained for resources,” says Douglas. “Radio frequency resources are constrained to begin with.”

Gone are the days when wireless providers bought spectrum at any price. These days they have to be smarter about what they pay. LCC International has tools that can help them figure out in advance what it will cost to build out networks – a process known as “dimensioning,” in the business. “We are the only entity that has those dimensioning tools,” says Douglas.

The bottom line: This company bills itself as having the know-how and experience to help wireless providers reach the next level of service offerings – and the insider buying backs it up. Meanwhile the stock looks cheap, and the company has enough cash to tide it over while it reaches to make the transition. I would buy right here.

Disclaimer

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.

For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

How to Trust but Verify in the Digital Age

By Michael Brush
April 06, 2006

One of the safest ways to go bottom fishing for troubled companies that could spring back is to look for businesses with a treasure trove of cash.

This cash – assuming there’s enough – can serve as a cushion to protect you from a sharp move down in the stock. Meanwhile, it gives the company some breathing room while it digs its way out of its hole.

That’s exactly what you find with a little Berkeley Heights, NJ-based business called Authentidate Holding (ADAT).

First, the cash: Authentidate had $52 million at the end of last year, which works out to $1.50 per share. The stock recently traded for $3.50.

Now for the potential rebound. Authentidate has three lines of business, but its new chief executive is counting on one to take off and make this company soar again. The ticket out: Software-based products that help companies confirm that important business documents were sent and received – and not altered if the details of a transaction have to be verified later.

“If you have a business process, especially one that spans across organizations, then very often one organization needs to prove to itself or someone else like a regulator that it has processed a certain type of content in a specific way,” says chief executive Surendra Pai.

That’s where Authentidate comes in.

Home medical equipment

The company achieved a coup of sorts last December when it signed up American HomePatient – a large provider of home medical equipment like oxygen tanks and wheel chairs. American HomePatient is using Authentidate’s software to streamline the paper flow with doctors and Medicare or insurance companies. The system also creates an “audit trail” in case there is trouble down the road.

Authentidate has a version of this product ready for companies that want to do everything electronically. But since doctors are still hopelessly stuck in the stone-age world of paper-based transactions, Authentidate had to tweak its offering to accommodate these digital laggards. In the system used by American HomePatient, doctors can still manage their side of the paperwork via fax – as they are accustomed.

But fully electronic versions of Authentidate’s offering will probably make it to the market, too. Pai thinks this foray into the medical equipment field is just the beginning. He also sees applications for document verification in law. Authentidate is testing products in law firms in South Carolina. The service could also be applied in other professions like finance, or even to verify electronic voting.

Only about 25% of Authentidate’s revenue comes from this more promising line of business. But that could change if recent growth trends are any indication. Revenue in this segment grew 13% in the last quarter of 2005 compared to the prior quarter. It came in at $1.25 million. The company also handles the technology behind the U.S. Postal Service’s electronic postmark offering. And it has a systems integration and a document imaging line.

Some clouds

To be sure, Authentidate has several clouds over it. Authentidate saw its finance chief leave at the end of January – not a comforting sign for many investors. And revenue is in decline. That’s just part of the shift from lower margin lines to the more profitable authentication software sales, says Pai.

Not even that cash hoard is safe, as plenty of sharks are circling to try to sink their teeth into it. While the stock took a sickening plunge to $2 at the end of last year from $18 in early 2004, several law firms sued Authentidate. Some are claiming that the Authentidate’s secondary offering in early 2004 – the one that raked in all the dough – was only successful because the stock was artificially high due to “misleading” comments about the company’s prospects.

These kinds of suits often go nowhere, but they are a distraction in the meantime.

The bottom line: The good news is that three insiders – including the chief executive – stepped up and purchased a healthy $200,000 worth of the company’s stock at prices between $2.76 and $3.40 in March, according to Thomson Financial. That’s not much below where you can buy it now. Since the first quarter – to be reported in the coming weeks -- may show signs of the beginnings of a turnaround, I’d buy right here. Given the recent volatility in the stock, you can probably improve your entry point with the judicious use of limit orders.

Disclaimer

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.

For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

The FedEx of Digital Content

By Michael Brush
March 30, 2006

If you produce video content that absolutely, positively has to get there on time, you turn to FedEx right?

No way. Instead, you are more likely call a tiny Burbank, Ca.-based company called Point.360 (PTSX). In a digital age when time goes by too fast for TV producers and advertisers just like the rest of us, Point.360 helps media moguls meet their deadlines.

Besides zapping high-definition (HD) versions of programs like ABC’s Desperate Housewives to Canadian broadcasters, Point.360 helps producers put the finishing touches on their product, convert it to new formats, and archive it safely.

The company also restores old video content so it is more presentable in high definition – making it harder to see telling details like suspension wires that would otherwise catch your attention in HD format.


Big insider bet

In late March Point.360’s chairman and chief executive Haig Bagerdjian plunked down $220,000 to buy another slug of his stock at $2.20. That brings his position – accumulated over the years through open market purchases, private transactions and options – to 2.9 million shares, or an impressive 29.7% of the company.

What’s going on here to explain this kind of conviction? “I believe in the future of the company. We are about to turn a corner,” says Bagerdjian.

Bagerdjian took over leadership of Point.360 two years ago when the company faced at least two big problems. It had been doing a lot of acquisitions of companies in its field, and they weren’t integrated. Next, the company had a huge debt load. “I thought with my management skills I could integrate the company and pay down the debt,” says Bagerdjian.

A work in progress

Bagerdjian inked a $10 million five-year term loan agreement with the General Electric Capital division of General Electric (GE) last January. Now the company is working on selling a building that came into the fold with one of its purchases. That should bring in another $10 million.

Reducing debt will improve profitability and make the stock more palatable to investors. Right now Point.360 has an enormous $19 million in debt, a burden that almost rivals its market cap of $23 million. At least the company brings in a lot of revenue – or about $64 million a year.

Besides shedding debt, Bagerdjian is working on getting out of lower margin businesses and taking on assignments that bring higher profits.

For example Point.360 used to distribute content for an ad agency serving BMW Group. But Point.360 moved up the food chain and began working for BMW itself, taking on additional responsibilities like “tagging” and archiving along the way. “Tagging” is when editors add the section on the end of a car ad that refers viewers in a national ad campaign to their local dealers. “We went upstream to work with the brand owner and expanded the service offering,” says Bagerdjian.

To deliver HD versions of Desperate Houswives on time for ABC, Point.360 developed a proprietary pipe that could handle the bigger HD content files without compromising quality.

And as more and more content converts to HD, and more players – like the phone companies – move into sending digital entertainment into the home, the need to quickly zap rich, digital content to distribution points will only increase. Another layer of complexity will arrive as consumers download more digital content to their hand-held devices like cell phones.

“When I look at what kind of requirements are put on studios and the content creators and the speed at which they have to get to market, I think we are sitting on a nice wave,” says Bagerdjian. “As time is compressed for our customers and the complexity increases, that forces them to look outside their four walls to specialists like us to meet their deadlines.”

In short, you can look at this company as an undiscovered play on the HD and digital content trend.

The bottom line: One problem is that Point.360 is so small and unknown – Thomson Financial lists no analysts following the stock -- it may take a while for the market to catch on that it is a turnaround. The good news is you can rest assured that you aren’t overpaying for the stock, in the meantime. Not only has management been buying near current levels, but the stock trades for around half of book value and a third of sales. That’s the kind of bargain you won’t often find in Hollywood, a culture better known for its extravagances. I’d buy shares right here and be prepared to wait, as usual with insider buying names, for the stock to advance.

Disclaimer

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.

For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.