Few “new” technologies have stirred as much controversy as nanotechnology – the science of how to exploit behavioral quirks that develop in materials when you smash them up into really tiny particles.
Coming onto the investment scene as a theme a few years ago (http://moneycentral.msn.com/content/P63642.asp), nanotechnology holds the promise of breakthroughs like powerful mini-computers, new families of drugs and diagnostic tools that can detect diseases early on, say proponents.
Detractors claim much of nanotech is plain old fraud – or at best nothing more than the latest trendy investment rubric that unscrupulous managers try to fit their companies into, as a way to generate buzz and attract funding.
A fraud?
Few critics have been as vocal as short-seller Manuel Asensio who has maintained a scathing campaign against at least one company seeking the nanotech mantel, NVE (NVEC). It should be no surprise, of course, that Asensio has had a short position in the stock – or a kind of bet that the stock will go down.
“NVEC still hunting for illiterate investors,” was the headline on a December missive from Asensio maintaining that NVE recently announced it had been awarded a research grant but failed to mention in the press release that it was for the minimal amount of $190,000. Other Asensio assaults have carried biting headlines like “Is NVEC a fraud?”
Since I started following Asensio’s attacks on NVE in late 2004, the company’s stock has declined over 50% to trade recently for around $16. The sharp decline underscores how easy it is to lose a lot of money investing in a single play billed as an easy ride on a hot technology.
In other words, investors really face two problems when looking for a way to play nanotech. First, they’d be dumb to ignore it, because many people will ultimately find ways to make a lot of money with nanotech. Second, however, there are no nanotech mutual funds. And buying a basket of these companies on your own can tie up a big part of your capital.
A small way to something big
Fortunately, insiders have recently been showing the way to an alternative that takes care of both these problems. Around the end of December, there was a small flurry of insider buying at a company called Harris & Harris Group (TINY).
Based in New York, Harris & Harris is a sort of venture capital fund that puts money into small, private companies that are working on nanotech breakthroughs. By following the insiders and buying shares of Harris & Harris, you’d be getting a diversified portfolio of potential winners in the nanotech field. To be sure, the Harris & Harris insider buying has been relatively light – only $111,000 since last summer.
But Harris & Harris still looks promising. In the past two weeks alone, it has:
* Invested in the Durham, North Carolina-based Metabolon, a company that is working on discovering biomarkers and measuring biochemical changes and how they affect metabolic pathways as a way to diagnose diseases early.
* Upped its investment in a company called Chlorogen which uses a technology that alters tobacco plants in a way that coverts them into little “factories” producing proteins that may one day treat gynecological cancers.
* Upped its investment in NanoGram, a San Jose, CA, company working on the application of nanotechnology in optical, electronic, and energy products.
These are among more than two dozen investments that Harris & Harris has going in the nanotech field.
Some concrete catalysts ahead?
If all this seems too esoteric, WR Hambrecht + Co. analyst John Roy identifies two more concrete near-term catalysts that could move the stock.
First, there’s a nanotech investing conference that will run from January 30 to February 2. News and presentations could move Harris & Harris shares.
Second, Roy expects a few nanotech initial public offerings soon. If successful, they would shine a spotlight on Harris & Harris – since it has investments in companies that may one day go public, too.
“While the next nanotechnology IPOs may not be in Harris & Harris' portfolio, successful nanotech IPOs will likely reflect well on the company,” believes Roy.
A wee bit of caution
To me, this is the kind of investment you put just a little money into for the long-term – meaning several years. Despite his enthusiasm for the stock, for example, Roy only has a $17 price target on it. The stock recently traded for $14.80 suggesting limited upside – though stocks in hot sectors are known to blow through analysts’ price targets fast.
What’s more, in a recent letter to shareholders, Harris & Harris said it may need to invest $200 million to $700 million over the next five years to keep on top of the field. That’s a lot of money for a company with limited revenue. So it may need to do a dilutive financing.
The bottom line: Some major breakthroughs are going to come out of this science of the small. But they could be a long time in coming. I’d only put a nano-slice of my investment portfolio into this stock as a way to play the developments.
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.
Thursday, January 26, 2006
Wednesday, January 18, 2006
Make Your Day with this Insider Signal on Steroids
In a highly unusual twist for an insider, the top dog at a teen retailer called Fossil (FOSL) recently signed up for a kind of pre-approved automatic trading program that allows executives to act even when they have insider information.
What’s odd about the move at Fossil is that the program is almost always used by insiders to sell stock like a robot no matter what – whether they know bad news is just around the corner or not.
In the case of Fossil, however, chief executive Kosta Kartsotis has signed up for the plan to buy his company’s stock. So far, Kartsotis has wasted little time snapping up a huge piece of Fossil stock.
Since December 16 he has purchased $5.5 million worth of stock in the $20 to $22.11 range, according to Thomson Financial. That alone would be a solid signal at a small company like this. Mix in the pre-programmed buying plan, and I’d call this an insider buy signal on steroids.
Fossil
What is Fossil and why might its shares continue higher? The company is probably best known for its watches. But Fossil also offers lines of leather goods, belts, handbags and apparel.
Wall Street analysts are generally gloomy about the company – but that’s actually good when insiders are so bullish. It means more people are on the sidelines waiting for the analyst cue to buy shares – and drive your shares higher if you own. Analysts worry about a big contraction in watch sales in the all-important U.S. market, high inventories, and lowered guidance for the last quarter.
Plus Fossil has committed the cardinal sin of retail. It did so well a year ago that now it faces tough “comps,” making today’s slowdown look even worse by comparison. But guess what. Once a retailer cycles through a year of missing challenging comps, it’s up against weaker comps once again. Voila -- suddenly the pressure is off and it can look good, even if business hasn’t returned to old levels.
But Fossil has other things going for it other than this distorted piece of psychology among retail investors. And as always I’ll take the insider signal over what the Wall Street analysts say, any day. Here’s what may bring Fossil up out of the bed rock of the Wall Street avoid list.
* Sure, U.S. watch sales were weak. But international sales – which make up about 44% of sales – were solid in the most recent quarter. They rose 12.7%. European sales increased 21%. Plus accessory sales in the U.S. were strong, with sales up 21% in handbags, women’s belts, small leather goods and sunglasses. This tells me that Fossil hasn’t lost its touch – and a recent shakeup of design teams in Dallas and Hong Kong might be what it takes to reinvigorate areas where Fossil is weak.
* Fossil is also rolling out new brands like Adidas. It’s planning to expand its luxury “Michelle” brand of watches into a lifestyle brand including jewelry and handbags. Fossil’s Zodiac brand is gaining momentum in Europe and the U.S.
* The company is also moving forward on a partnership with Wal-Mart, after a successful test phase.
The tricky thing about retail is that you always have to be one step ahead of the market – creating styles that people will like at some point in the future even if you have no clue whether they will work as you place the orders for next season.
But given the chief executive’s pre-programmed buying plan and the huge $5.5 million worth of stock he has purchased so far, I’d say there’s an internal confidence level at Fossil that’s compelling.
The bottom line: What’s more, the board itself just authorized a new 3.5 million share repurchase plan, while the company has about 700,000 shares left on the old one. With retail, the insider signal can lead you astray, as we found with Gander Mountain (GMTN) which stopped out with a 20% loss. But this one is so strong I’d buy shares right here.
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.
What’s odd about the move at Fossil is that the program is almost always used by insiders to sell stock like a robot no matter what – whether they know bad news is just around the corner or not.
In the case of Fossil, however, chief executive Kosta Kartsotis has signed up for the plan to buy his company’s stock. So far, Kartsotis has wasted little time snapping up a huge piece of Fossil stock.
Since December 16 he has purchased $5.5 million worth of stock in the $20 to $22.11 range, according to Thomson Financial. That alone would be a solid signal at a small company like this. Mix in the pre-programmed buying plan, and I’d call this an insider buy signal on steroids.
Fossil
What is Fossil and why might its shares continue higher? The company is probably best known for its watches. But Fossil also offers lines of leather goods, belts, handbags and apparel.
Wall Street analysts are generally gloomy about the company – but that’s actually good when insiders are so bullish. It means more people are on the sidelines waiting for the analyst cue to buy shares – and drive your shares higher if you own. Analysts worry about a big contraction in watch sales in the all-important U.S. market, high inventories, and lowered guidance for the last quarter.
Plus Fossil has committed the cardinal sin of retail. It did so well a year ago that now it faces tough “comps,” making today’s slowdown look even worse by comparison. But guess what. Once a retailer cycles through a year of missing challenging comps, it’s up against weaker comps once again. Voila -- suddenly the pressure is off and it can look good, even if business hasn’t returned to old levels.
But Fossil has other things going for it other than this distorted piece of psychology among retail investors. And as always I’ll take the insider signal over what the Wall Street analysts say, any day. Here’s what may bring Fossil up out of the bed rock of the Wall Street avoid list.
* Sure, U.S. watch sales were weak. But international sales – which make up about 44% of sales – were solid in the most recent quarter. They rose 12.7%. European sales increased 21%. Plus accessory sales in the U.S. were strong, with sales up 21% in handbags, women’s belts, small leather goods and sunglasses. This tells me that Fossil hasn’t lost its touch – and a recent shakeup of design teams in Dallas and Hong Kong might be what it takes to reinvigorate areas where Fossil is weak.
* Fossil is also rolling out new brands like Adidas. It’s planning to expand its luxury “Michelle” brand of watches into a lifestyle brand including jewelry and handbags. Fossil’s Zodiac brand is gaining momentum in Europe and the U.S.
* The company is also moving forward on a partnership with Wal-Mart, after a successful test phase.
The tricky thing about retail is that you always have to be one step ahead of the market – creating styles that people will like at some point in the future even if you have no clue whether they will work as you place the orders for next season.
But given the chief executive’s pre-programmed buying plan and the huge $5.5 million worth of stock he has purchased so far, I’d say there’s an internal confidence level at Fossil that’s compelling.
The bottom line: What’s more, the board itself just authorized a new 3.5 million share repurchase plan, while the company has about 700,000 shares left on the old one. With retail, the insider signal can lead you astray, as we found with Gander Mountain (GMTN) which stopped out with a 20% loss. But this one is so strong I’d buy shares right here.
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.
Wednesday, January 11, 2006
Look for Profits in This “Everyman’s IPO”
By Michael Brush
January 12, 2006
One of the most common questions I get as a market columnist is: “How can I participate in initial public offerings (IPO)?”
The allure of the IPO is understandable. Many IPO stocks grab headlines by rising dramatically right out of the gate (even if quite a few don’t work out so well).
Unfortunately, to join the IPO party you have to be a fairly high roller with a big brokerage account. Otherwise, you are out of luck.
There is one exception, and a solid pattern of insider purchasing points us to a promising example that looks like a solid buy right now.
The “Everyman’s IPO”
Here’s one way regular investors can break into the exclusive IPO club. Very small companies often come public by merging into shell companies that are already listed on an exchange. The beauty is that anyone can buy the shares of the shell company in advance – even without a big account at brokerage – to participate in this back door IPO. It’s a kind of “everyman’s IPO.”
This chain of events is about to play out next month at the Tampa, Florida-based CEA Acquisition Corp. (CEAC.OB) when a private biotech company called etrials Worldwide merges into CEA.
The result should be a publicly traded company that will likely be dramatically undervalued compared to a competitor. That – plus healthy growth -- should mean decent profits down the road for anyone who buys shares of CEA right now.
PDAs for guinea pigs
What does etrials Worldwide do? It sells software and electronic devices that human guinea pigs in drug trials use to keep track of things. Patients enter data into devices similar to personal digital assistants (PDAs), which transmit the information to labs.
Several giants of the pharmaceutical industry are etrials customers, including: Pfizer (PFE), Genzyme (GENZ) and Wyeth (WYE). The company’s equipment was used in the clinical studies on Viagra.
This electronic system of collecting data is faster, easier and more accurate than the traditional approach – patients using a pen and spiral notebook to keep diaries.
That’s why companies like etrials and DATATRAK International (DATA) – a public version of etrials – are growing so fast. And it looks like there is plenty of room for more growth. Right now, patients in about 75% of trials still use the spiral notebook approach. That should continue to fall. Meanwhile, the number of clinical trials is growing each year by about 15%.
Rapid growth
This helps explain why DATATRAK's revenue increased approximately 45% to $11.4 million for the first three quarters of 2005.
At etrials, revenue grew at between 50% and 72% a year for 2002 through 2004. These rates will slow down – since etrials has been growing off a small revenue base.
But investment bankers involved in the etrials deal – bankers who admittedly have a bias – use annual revenue growth projections of about 30% a year for the next four years, in their valuation models. If they are right, etrials revenue will grow to $45.6 million in 2009 from $15.8 million in 2005.
Undervalued shares
The way CEA shares are priced right now, at $5.40, it doesn’t look like the market sees what’s coming in the merger with etrials. Let’s walk through some numbers to see why.
DATATRAK trades for an enterprise value (market cap minus cash plus debt) of $86 million, or about 5.8 times its $14.8 million in sales.
But the new CEA, after etrials is folded in, looks like it will have an enterprise value of around $43 million, when all is said and done with the merger. That’s less than thee times sales, compared to the 5.8 at DATATRAK. And it’s half the enterprise value of DATATRACK, even though etrials has roughly the same amount of trailing revenue.
Good visibility
These companies also have solid backlogs. This isn’t surprising since clinical trials drag on for years. Still, the backlogs offer excellent revenue visibility. DATATRAK’s backlog of $17.4 million exceeds its trailing annual revenue of around $14 million. At etrials the difference is even greater. The company has about a $22 million backlog compared to about $15 million in revenue for last year.
The bottom line: It’s already a positive sign that CEA insiders – who already own a lot of stock – have purchased about $800,000 worth since mid-November, at prices near current levels, or $5.19 to $5.50. But insiders at CEA and etrials are also placing a simple and enticing bet which shows a lot of moxie. As part of the merger deal, they’ve agreed to put 1.4 million shares in an escrow account that will vanish unless the new CEA stock trades above $7 before February 2008. CEA should also get a boost right off the bat when it transfers to Nasdaq from the bulletin board later this year. I’d buy right here, while the market still hasn’t figure out all that’s about to happen.
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.
January 12, 2006
One of the most common questions I get as a market columnist is: “How can I participate in initial public offerings (IPO)?”
The allure of the IPO is understandable. Many IPO stocks grab headlines by rising dramatically right out of the gate (even if quite a few don’t work out so well).
Unfortunately, to join the IPO party you have to be a fairly high roller with a big brokerage account. Otherwise, you are out of luck.
There is one exception, and a solid pattern of insider purchasing points us to a promising example that looks like a solid buy right now.
The “Everyman’s IPO”
Here’s one way regular investors can break into the exclusive IPO club. Very small companies often come public by merging into shell companies that are already listed on an exchange. The beauty is that anyone can buy the shares of the shell company in advance – even without a big account at brokerage – to participate in this back door IPO. It’s a kind of “everyman’s IPO.”
This chain of events is about to play out next month at the Tampa, Florida-based CEA Acquisition Corp. (CEAC.OB) when a private biotech company called etrials Worldwide merges into CEA.
The result should be a publicly traded company that will likely be dramatically undervalued compared to a competitor. That – plus healthy growth -- should mean decent profits down the road for anyone who buys shares of CEA right now.
PDAs for guinea pigs
What does etrials Worldwide do? It sells software and electronic devices that human guinea pigs in drug trials use to keep track of things. Patients enter data into devices similar to personal digital assistants (PDAs), which transmit the information to labs.
Several giants of the pharmaceutical industry are etrials customers, including: Pfizer (PFE), Genzyme (GENZ) and Wyeth (WYE). The company’s equipment was used in the clinical studies on Viagra.
This electronic system of collecting data is faster, easier and more accurate than the traditional approach – patients using a pen and spiral notebook to keep diaries.
That’s why companies like etrials and DATATRAK International (DATA) – a public version of etrials – are growing so fast. And it looks like there is plenty of room for more growth. Right now, patients in about 75% of trials still use the spiral notebook approach. That should continue to fall. Meanwhile, the number of clinical trials is growing each year by about 15%.
Rapid growth
This helps explain why DATATRAK's revenue increased approximately 45% to $11.4 million for the first three quarters of 2005.
At etrials, revenue grew at between 50% and 72% a year for 2002 through 2004. These rates will slow down – since etrials has been growing off a small revenue base.
But investment bankers involved in the etrials deal – bankers who admittedly have a bias – use annual revenue growth projections of about 30% a year for the next four years, in their valuation models. If they are right, etrials revenue will grow to $45.6 million in 2009 from $15.8 million in 2005.
Undervalued shares
The way CEA shares are priced right now, at $5.40, it doesn’t look like the market sees what’s coming in the merger with etrials. Let’s walk through some numbers to see why.
DATATRAK trades for an enterprise value (market cap minus cash plus debt) of $86 million, or about 5.8 times its $14.8 million in sales.
But the new CEA, after etrials is folded in, looks like it will have an enterprise value of around $43 million, when all is said and done with the merger. That’s less than thee times sales, compared to the 5.8 at DATATRAK. And it’s half the enterprise value of DATATRACK, even though etrials has roughly the same amount of trailing revenue.
Good visibility
These companies also have solid backlogs. This isn’t surprising since clinical trials drag on for years. Still, the backlogs offer excellent revenue visibility. DATATRAK’s backlog of $17.4 million exceeds its trailing annual revenue of around $14 million. At etrials the difference is even greater. The company has about a $22 million backlog compared to about $15 million in revenue for last year.
The bottom line: It’s already a positive sign that CEA insiders – who already own a lot of stock – have purchased about $800,000 worth since mid-November, at prices near current levels, or $5.19 to $5.50. But insiders at CEA and etrials are also placing a simple and enticing bet which shows a lot of moxie. As part of the merger deal, they’ve agreed to put 1.4 million shares in an escrow account that will vanish unless the new CEA stock trades above $7 before February 2008. CEA should also get a boost right off the bat when it transfers to Nasdaq from the bulletin board later this year. I’d buy right here, while the market still hasn’t figure out all that’s about to happen.
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.
Thursday, January 05, 2006
Globalize This!
By Michael Brush
January 05, 2006
Globalization is great if you like to buy -- or sell -- cheap goods.
But it is tough on managers at companies that make goods at plants around the globe.
They have to synchronize the flow of everything from raw materials and components, to finished goods. And they have to forecast demand accurately or know how to respond quickly – so they always have enough goods on hand without getting bogged down in margin-killing inventory.
That’s one reason the shares of “supply chain management” consulting companies caught fire in the late 1990s just as globalization hit its stride. But like the stocks riding many of the investment crazes of that era, supply chain management shares crashed and burned, leaving a few struggling survivors.
One of them is i2 Technologies (ITWO), a $15 stock which -- believe it or not -- once traded for more than $2,500 a share back in bubble days of 2000, adjusting for splits.
Unfortunately, the company took investors on the proverbial roller coaster ride yet once again last year. A series of troubles and mishaps spooked shareholders – from missed earnings and life-threatening debt levels, to a management overhaul and a forced exit from a stock exchange (since reversed).
Throughout the turmoil, insiders who believed the market was missing i2’s potential must have been champing at the bit to buy shares. Because when they finally got the chance in November as company rules allowed them to purchase, they did so in a big way. Several top insiders bought over $1 million worth of stock at the end of November, according to Thomson Financial.
That’s some kind of conviction. I think it’s a cue you will see decent gains over the course of a year or two if you follow their signal.
New leadership
In short, this is a company on the rebound that has burned investors in the past. So they’re passing up on the stock. But they’ll likely regret it a year from now since the company is now in competent hands, and it’s in the midst of a promising turnaround.
Since last March, i2 has been lead by Michael McGrath, who comes from a successful consulting company in supply chain management called PRTM, which McGrath he founded in the 1970s. His record shows he has a kind of Midas touch in this field. He’s now putting it to work in a turnaround that has many of the usual components.
Cost cutting and debt restructuring
First off, McGrath has cut costs by doing things like adjusting the size of the work force, cutting back on excessive billing for travel to visit clients in the flirtation phase, and even reducing the widespread use of corporate cell phones. McGrath has also cleaned up i2’s finances and restructured its debt. That’s brought down interest costs. But it’s also cleared concerns from the minds of potential clients who had worried that i2 might not be around in a year or two to keep its promises.
Revenue growth
All of this is good, but it won’t mean much without a solid kick to revenue growth. McGrath estimates the supply chain sector is growing at about 5% a year, a decent start. But he figures i2 will be able to grow much faster than that by taking share -- in part by moving into new sectors like pharmaceuticals, life sciences, government and defense.
“Even though we are largest in the marketplace, we still only have 8% of the market,” says McGrath. “It is very fragmented, and it does not need to be.”
McGrath sees potential in retail. Right now, Dell (DELL) uses i2 software to reschedule its factories every two hours. “They get new orders and have to determine where to make them and what material they will need to make them and where it is most cost effective to do this.” Big consumer electronics retailers like Best Buy (BBY) would love to have the same power, and McGrath believes i2 can provide it.
The company also has a new product line called Forecast Optimization which front-loads a consulting component. Theoretically, clients will see swift results in this phase, which will entice them into buying software in longer-term commitments.
The bottom line: JMP Securities analyst Patrick Walravens has a price target of $25 on i2, which would bring 65% gains for anyone who buys here. We may not see $25 in twelve months. But given the turnaround and the way insiders snapped up shares the first chance they got – at around $13.75 or near recent trading levels – this stock seems like a decent bet 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.
January 05, 2006
Globalization is great if you like to buy -- or sell -- cheap goods.
But it is tough on managers at companies that make goods at plants around the globe.
They have to synchronize the flow of everything from raw materials and components, to finished goods. And they have to forecast demand accurately or know how to respond quickly – so they always have enough goods on hand without getting bogged down in margin-killing inventory.
That’s one reason the shares of “supply chain management” consulting companies caught fire in the late 1990s just as globalization hit its stride. But like the stocks riding many of the investment crazes of that era, supply chain management shares crashed and burned, leaving a few struggling survivors.
One of them is i2 Technologies (ITWO), a $15 stock which -- believe it or not -- once traded for more than $2,500 a share back in bubble days of 2000, adjusting for splits.
Unfortunately, the company took investors on the proverbial roller coaster ride yet once again last year. A series of troubles and mishaps spooked shareholders – from missed earnings and life-threatening debt levels, to a management overhaul and a forced exit from a stock exchange (since reversed).
Throughout the turmoil, insiders who believed the market was missing i2’s potential must have been champing at the bit to buy shares. Because when they finally got the chance in November as company rules allowed them to purchase, they did so in a big way. Several top insiders bought over $1 million worth of stock at the end of November, according to Thomson Financial.
That’s some kind of conviction. I think it’s a cue you will see decent gains over the course of a year or two if you follow their signal.
New leadership
In short, this is a company on the rebound that has burned investors in the past. So they’re passing up on the stock. But they’ll likely regret it a year from now since the company is now in competent hands, and it’s in the midst of a promising turnaround.
Since last March, i2 has been lead by Michael McGrath, who comes from a successful consulting company in supply chain management called PRTM, which McGrath he founded in the 1970s. His record shows he has a kind of Midas touch in this field. He’s now putting it to work in a turnaround that has many of the usual components.
Cost cutting and debt restructuring
First off, McGrath has cut costs by doing things like adjusting the size of the work force, cutting back on excessive billing for travel to visit clients in the flirtation phase, and even reducing the widespread use of corporate cell phones. McGrath has also cleaned up i2’s finances and restructured its debt. That’s brought down interest costs. But it’s also cleared concerns from the minds of potential clients who had worried that i2 might not be around in a year or two to keep its promises.
Revenue growth
All of this is good, but it won’t mean much without a solid kick to revenue growth. McGrath estimates the supply chain sector is growing at about 5% a year, a decent start. But he figures i2 will be able to grow much faster than that by taking share -- in part by moving into new sectors like pharmaceuticals, life sciences, government and defense.
“Even though we are largest in the marketplace, we still only have 8% of the market,” says McGrath. “It is very fragmented, and it does not need to be.”
McGrath sees potential in retail. Right now, Dell (DELL) uses i2 software to reschedule its factories every two hours. “They get new orders and have to determine where to make them and what material they will need to make them and where it is most cost effective to do this.” Big consumer electronics retailers like Best Buy (BBY) would love to have the same power, and McGrath believes i2 can provide it.
The company also has a new product line called Forecast Optimization which front-loads a consulting component. Theoretically, clients will see swift results in this phase, which will entice them into buying software in longer-term commitments.
The bottom line: JMP Securities analyst Patrick Walravens has a price target of $25 on i2, which would bring 65% gains for anyone who buys here. We may not see $25 in twelve months. But given the turnaround and the way insiders snapped up shares the first chance they got – at around $13.75 or near recent trading levels – this stock seems like a decent bet 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.
Subscribe to:
Posts (Atom)
