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.