Insiders Corner by Michael Brush at Investorideas.com

Cancer Drug IPO Sees Strong Insider Interest

2007-02-15T10:13:00.000-08:00

By Michael Brush
Exclusively for InvestorIdeas.com
February 15, 2007

Initial public offerings (IPOs) that see lots of insider buying as soon as they come out have been doing well, so let’s try another one.

I typically like to see big purchases – millions of dollars worth -- with these to make them work. That’s what we have with a Lexington, MA-based biotech company called Synta Pharmaceuticals (SNTA).

An early-stage drug development company, Synta has a rich library of chemical compounds, small molecules and plant extracts that it mines for drugs that may some day battle scourges like skin cancer or inflammation-related ailments like rheumatoid arthritis.

The company has two potential drugs moving into late-stage clinical trials, plus two in preclinical studies, and another in very early-stage development.

Insiders vs. the market

Synta came public on February 6. It opened in a range of $9-$10, and it’s been there ever since. Three days after the start of trading, directors and line officers purchased over $10 million of the stock for $10 share – where you can buy it now.

Besides the sheer size, another thing makes these purchases attractive. The stock had to be discounted by more than 30% from its proposed $14-$16 range to get the deal done. Plus the deal size had to be cut. That may sound like bad news, but the combo of insider buying on a deal that had to be discounted is bullish, to me. That’s because some of the best insider-buy stocks are the ones favored by insiders while the market is not so certain. That’s the case here.

Here’s another plus. Synta hasn’t given up marketing rights to partners in exchange for cash. Instead, it owns the rights to all of its potential drugs in all markets and for all potential uses. Often, emerging biotech companies have to swap rights to some markets in exchange for cash to survive. Synta will probably have to do that at some point. But it’s a comfort to know it hasn’t yet. This means it has an ace in the hole for when it needs to raise cash – instead of what might be a more dilutive follow-on offer or secondary.

Here’s a look at what therapies the company has in the pipeline.

Cancer drugs

Synta’s most advanced drug, which goes by the code name STA-4783 for now, is a compound that battles cancer by stressing out cells. It causes something called “oxidative stress.” The stress is more pronounced in cancer cells than in normal cells. It also causes more damage to cancer cells. What’s more, the response makes cancer cells more vulnerable to attack by the immune system and to a natural process in the body called “programmed cell death.” Many cancers occur because programmed cell death gets derailed, so too many cells grow.

The compound STA-4783 seems to work well in combination with a chemotherapy treatment called paclitaxel, which is sold by Bristol-Myers Squibb under the name Taxol. In phase II trials, Synta has found that this one-two punch helps people with a form of skin cancer called metastatic melanoma. Melanoma is one of the deadliest forms of cancer when it is not caught early enough and removed.

Synta has “fast track” status for this compound with the Food and Drug Administration (FDA) -- for the treatment of metastatic melanoma. The company hopes to start Phase III trials in the middle of this year. It also plans to start Phase II trials on other forms of cancer this year.
Another potential anti-cancer drug in the pipeline is called STA-9090. It inhibits something in the body called “heat shock protein 90.” This protein regulates the activity of “signaling proteins,” like kinase proteins, that trigger uncontrolled cell growth. In preclinical trials, this compound has been effective in animal models of human cancers. The company hopes to file an “investigational new drug” application with the FDA in the first half of this year.

A third anti-cancer compound, called STA-9584, may work by disrupting the blood vessels that supply tumors with oxygen and nutrients. It seems to work against established blood vessels, unlike “anti-angiogenesis” cancer therapies in use today like Avastin, developed by Genentech (DNA). Avastin only stops the development of new blood vessels for tumors. This drug is in very early-stage “preclinical” development.

Inflammatory disease treatments

Inflammatory diseases like rheumatoid arthritis, Crohn's disease, multiple sclerosis and psoriasis are typically caused by an immune system gone awry. While the immune system normally protects the body, in autoimmune diseases it attacks the body's own tissues.
Synta has two possible treatments here:

Apilimod regulates the inflammation pathways used in some autoimmune and inflammatory diseases. Apilimod has failed against two inflammatory diseases -- psoriasis and Crohn's disease. But Synta thinks it may work against rheumatoid arthritis and a disease called common variable immunodeficiency. This is a disease in which antibodies aren’t produced correctly, which can lead to infections and other problems. Apilimod is in Phase II trials. The company expects results this year.
Another potential drug helps produce cells and substances which block inflammation. This one has a tongue-twister of a name: Calcium release-activated calcium (CRAC) Ion Channel Inhibitor.

A long ways to go

Like most early-stage biotech companies, Synta faces many hurdles besides proving that these compounds work. If they do actually work, it then has to move on to manufacturing and marketing, and finding partners to work with. All of these things take time – which means you have to be patient if you buy this stock. That said, the stocks of biotech companies can move up sharply way before they ever get a product to market, as they clear research and partnership hurdles along the way.

The bottom line : Biotech companies are always risky and speculative. But when you see insiders plow so much money into one, it increases the chances of success, even if that still doesn’t make them a sure bet. With a number of catalysts set to occur this year for Synta, I’d 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.

Three Tiny Mo-Mo Stocks for a Big Mo-Mo Market

2007-01-25T06:23:00.000-08:00

By Michael Brush
Exclusively for InvestorIdeas.com
January 25, 2007

There’s so much bullishness in the market now as indices and many stocks hit all-time highs, you need to be careful. Often when bullishness gets to these extremes, a pullback providing better prices lies around the corner.

But if you insist on jumping on the bandwagon and buying stocks trading at or near all-time highs, why not go along with insiders who are doing the same?

That’s what you have with three small, uncovered companies:

Tix (TIXC), which sells discount show tickets in Las Vegas

Integrated Electrical Services (IESC), an electrical contractor

FRMO (FRMO), a sophisticated investment research shop whose revenue is growing rapidly along with client assets

All three of these companies have had great runs, and they are trading at or near twelve-month highs – if you ignore few anomalous trading days for FRMO at the end of December. What’s even better, insiders have been buying all the way up, including at recent prices. That shows a kind of moxie that says these little momentum names are headed even higher.

If you follow insiders into these three stocks, just remember as always to have a time horizon of at least a year or two – as insiders typically buy with the same kind of outlook.

Tix (TIXC)

What goes to Vegas stays in Vegas – and not only because the house odds are stacked against you. Long gone are the sweet deals -- unless, of course, you are flexible and you stop by any of the four Vegas ticket booths of Tix4Tonight.

Tix4Tonight, a division of Tix, sells tickets for Las Vegas shows at 50% off the original box office price, on the same day of the performance. The outfit has non-exclusive agreements with about 60 of the roughly 80 shows in Las Vegas at any given time. It offers tickets for about 50 shows each day.

Business is booming.

Revenue doubled in the third quarter of last year to $1.4 million, and the company reported three cents a share in earnings. Tix also looks financially sound. It has about $1.2 million in cash and minimal debt, and it produced about a half a million dollars in cash in the first nine months of the year, up from $44,000 in 2005.

Last summer, Tix launched Tix4Dinner, which offers reservations for discounted dinners at a set time at restaurants on the Las Vegas strip. This business contributed little in the third quarter.

But it just started, and insiders apparently see big things ahead. Since December 19, they have purchased $442,000 worth of stock for prices between $4.41 and $4.93, according to InsiderScore.com. The stock recently traded for $4.85. A director named Benjamin Frankel was recently selling, but that doesn’t bother me. He also sold a year ago at 50 cents a share.

Integrated Electrical Services (IESC)

When builders need an electrician, they call Integrated Electrical Services. Operating out of 121 locations in 48 states, this company does the wiring for everything from office buildings and power plants, to airports, theaters, stadiums, high-rise residential buildings, factories, and hospitals.

You might have second thoughts about buying shares of a company with exposure to the housing market. But I wouldn’t worry about it. Commercial construction is booming, and this company has gotten anywhere from 58% to 66% of its revenue from commercial and industrial work in the past three years.

Shares of the company, which was in and out of bankruptcy last year, are being accumulated by Tontine Management, a contrarian and value-oriented hedge fund. Tontine bought $2.8 million worth at $18.02 on January 3. Company insiders have purchased $120,000 since mid December for prices between $14 and $20.16. The stock recently traded for $22.80.

FRMO (FRMO)

FRMO conducts investment research for hedge funds and mutual funds, with a focus on ferreting out intellectual property that is undervalued and in the early stages of development.

It must be doing a good job, because research fees are growing leaps and bounds. Fees collected from one client called Kinetics Advisers’ Hedge Funds grew to $2.9 million last year from $960,000 in 2004. Revenue from another client called Kinetics Paradigm Fund grew to $2.1 million last year from $125,000 in 2004. All told, FRMO fees grew six times to $6.6 million last year from $1.1 million in 2004.

Now the research shop looks poised for more growth as it also advises newer funds called Horizon Global Advisers incorporated in Ireland and Croupier Offshore Fund, incorporated in the Caymen Islands.

Director Lawrence Goldstein has been a regular buyer since September when the stock traded at $4. His most recent purchase was a few days ago on January 19 when he bought $114,000 worth at $8.22. The stock recently traded for $7.50.

One drawback is that this company trades in the pink sheets, still one of the more Neanderthal exchanges despite recent attempts to modernize. Pink sheet companies don’t have to provide regular filings.

And buying this stock may require a call to your broker if you want your offer to get displayed between the bid and the asking price to get a better deal on your purchase. But this being the pink sheets, you may not get represented, even if you call. Pink sheet market makers, after all, enjoy the piggish profits they can make on the big spreads, for doing nothing.

The bottom line: If you are going to go long in markets trading at or near all time highs, you might as well go along with insiders who are doing the same. That’s what you have with these three stocks, which all look like buys right here. Just be prepared for a pullback if something spooks the bulls all around you.

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: /insiderscorner/. InvestorI deas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp . InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

Look Out Energizer Bunny, Here Comes the Fuel Cell Battery

2007-01-18T09:20:00.000-08:00

Wouldn’t it be nice to get a month out of your cell phone battery without having to recharge?

That may sound far fetched. But it’s the kind of mileage you could see from fuel cell-based batteries in a few years.

The futuristic battery is based on what’s called direct methanol fuel cell technology (DMFC). An Albany, NY-based company called Mechanical Technology (MKTY) has a version of the battery that can last for over 90 hours.

Plus it probably won’t blow up in your lap.

Of course fuel cells, like many other kinds of “alternative energy,” are one of those areas that hold plenty promise -- and let down -- for investors. So if you buy shares of Mechanical Technology, limit your exposure and be prepared to think long term.

“This is one of our most speculative stocks,” agrees Edward Guinness of the London-based Guinness Atkinson Alternative Energy Fund (GAAEX), which holds the stock. “We are in it eyes wide open coming up against crunch time. The problem is it they are nearly a year and a half from hitting a revenue upswing. The next 18 months are going to be key.”

But like Guinness, I’ll give Mechanical Technology the benefit of the doubt as a speculative play -- because insiders have been buying the stock.

In November insiders purchased $262,000 worth for $1.81-$2 right before the stock shot up to nearly $3. Then chief executive Peng Lim bought $20,000 worth in the pullback in late December. You can get it even cheaper now at around $1.80.

I’d be a buyer, for the following reasons.

Strong partnerships

Mechanical Technology is developing fuel cell batteries with several high-profile partners, including the Duracell division of Gillette, the cell phone maker Samsung, and the U.S. Air Force and the Army.

It has a low-powered battery for consumer applications (called Mobion-1) that packs a lot more power than standard lithium-ion batteries – the kind you use now. One problem: The battery is still too big.

Mechanical Technology is also developing high-powered versions of this battery for use by the military (Mobion-30) in applications like satellite communications systems.

The company is in the demonstration phase for each. But it hopes to be selling the military batteries in 2008.

End of the road for lithium-ion

Makers of lithium-ion batteries been cramming more and more energy into smaller batteries, and they’ve pushed the limits. The result has been exploding batteries – which recently lead to a massive laptop battery pack recall by Apple (AAPL) and Dell (DELL).

The whole affair heightens the interest in fuel cell batteries, believes Rodman & Renshaw analyst Amit Dayal. Besides, portable digital gadgets will continue to demand more memory and computing power to handle more complex tasks. This calls for more power – and fuel cell batteries may be the answer.

Pure methanol

Mechanical Technology develops fuel cells in its MTI MicroFuel Cells division. Rodman & Renshaw’s Dayal thinks the company’s direct methanol micro fuel cells are superior to those of competitors because they run on pure methanol, which means they produce more power. The batteries operate on a small cartridge of methanol, and they can be “recharged” instantly by putting in a new cartridge.

Bigger potential upside

With a market cap of just $55 million, Mechanical Technology looks like a better deal than competing plays like Medis Technologies (MDTL) which has a market cap ten times the size. “There is significantly more upside in Mechanical Technology if this does take off,” says Guinness.

Cash burn

By a rough calculation, Mechanical Technology seems like it could go a year or more without another dilutive capital raise. It looks Mechanical Technology used up about $13 million to $14 million in cash in 2006.

As of early November the company had $5 million in cash. It also held shares of Plug Power (PLUG), which the company helped found, worth $11.6 million. It December, it raised $10.3 million by selling stock to RG Capital Management based in the Cayman Islands.

While the MTI MicroFuel Cells division burns cash, the company also has an instruments division that produced $1.7 million in revenue in the third quarter, an increase of 19%. The company has no debt, and it has a tax loss carry-forward of about $46 million.

Mechanical Technology may announce a new partnership in the private sector this year, and the Department of Energy could increase funding for alternative fuel cell technology. It expects sales in the military sector to start in 2008.

The bottom line: These kinds of alternative energy plays often flame out – so be careful with position size. But the recent round of insider buying suggests this company is one of the safer ways to get exposure to what could be a big deal in consumer electronics a few years down the road.

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.

An Unconventional Energy Player in the Driver’s Seat

2007-01-11T07:44:00.000-08:00

Our energy bets are bruised and battered, and it’s easy to see why.

By Michael Brush
Exclusively for InvestorIdeas.com
January 11, 2006

Investors had big bet on energy stocks, but now that crude oil has fallen 9% this year and 30% since last summer, hedge funds are heading for the exits.

Is there any end in sight?

It may be just around the corner. The eerily warm weather in much of the U.S. is about to "turn on a dime," predicts AccuWeather.com forecaster Joe Bastardi.

"Those who think that this winter is going to remain mild are in for a shock," he says. "A week from now, we'll start seeing truly cold air across much of the country, and we expect this change to last.” By the end of the month, people in the Northeast will be shoveling out their driveways, and today’s mild weather “will be a distant memory," he says.

I wouldn’t be surprised. A sharp reversal in the second half of winter can be common when an El Nino pattern causes unusually warm weather in the first half – the case right now.

The arrival of cold winter weather to the environs of a good portion of the world’s energy traders in New York will likely reverse the negative psychology towards the sector – and put a bid under our energy stocks.

Besides a change in the weather, these factors should support higher energy prices:

Strong global growth and demand from countries like China and India.
Tensions in the Middle East -- which have moved off the front pages but haven’t gone away.
Underlying shortages of natural gas in Northern America where prices are higher compared to a few years back because all the easy reserves have been exploited.
We’ve even seen a little insider buying in this pullback. Insiders recently bought at Weatherford International Ltd. (WFT) click here). Aubrey McClendon and other top execs at Chesapeake Energy (CHK) were recently buying (click here). There were also buyers in late December at Abraxas Petroleum (ABP) (click here).

Panhandle Royalty

Here’s another energy stock where a savvy director recently stepped up to buy: Panhandle Royalty (PHX). This is a micro-cap natural gas company with solid holdings in two of the hottest natural gas plays around: the Fayetteville Shale in Arkansas and the Woodford Shale in Oklahoma.

The buyer was Robert Robotti, a money manager at Robotti & Company Advisors. Specializing in small-cap names, his firm has beaten the market consistently over years. On January 8, Robotti bought $291,000 worth of Panhandle Royalty stock. That took his position up to 576,000 shares, according to Insiderscore.com, or 6.8% of the company’s shares outstanding.

Cooperative beginnings

While most energy companies have to lease land, take on most of the investment risk and giving up a big part of the profits as well, Panhandle Royalty is on the other side of this equation.

It owns big swaths of energy-rich land in Oklahoma, New Mexico, Texas and some other states, thanks in part to its humble origins as an energy cooperative eight decades ago.

The company was founded in the Oklahoma Panhandle in 1926 as the Panhandle Cooperative Royalty Company. For years it functioned as a co-op based on a simple principle. Any single individual in that area at the time might own land with rich energy reserves. But it wasn’t a sure thing. Given the uncertainty, wouldn’t it be better for lots of landholders to pool their land and then share equally in any finds?

A lot of people thought so, and the co-op was born. It converted into a company in 1979, and it still holds 260,000 acres in energy-rich regions.

It holds “unconventional resource plays,” meaning the energy is tougher to get out. It’s usually done through horizontal wells. But a little math – and speculation – shows the potentially huge amount of energy Panhandle Royalty controls in these unconventional plays, which now get a lot more attention because natural gas prices have gone up so much.

Fayetteville and Woodford

Let’s take Panhandle Royalty’s 9,000 acres in the Fayetteville Shale in Arkansas first. Panhandle Royalty has leased out the land for a $2 million fee and an 18.75% royalty. It will also take a “working interest” in some wells that will cost some capital and yield a 5% or so revenue share.

But here’s the key question: How much natural gas lies beneath Panhandle Royalty’s land? One way to guess is to look at what other energy companies are finding. Southwestern Energy (SWN) and other players there are reporting two to three billion cubic feet of gas (BCF) per well.

Panhandle Royalty’s 9,000 acres could have about 80 wells, or 160 BCF of gas. If that’s right, Panhandle Royalty’s 18.75% share would work out to about 30 BCF of natural gas. That’s nearly double its current 34 BCF of proven reserves.

The potential for Panhandle Royalty’s 10,000 acres in the Woodford Shale in Oklahoma is even greater. Based on production numbers from Newfield Exploration (NFX) – and assuming Panhandle Royalty’s holdings are equally productive – Panhandle could have 240 BCF worth of gas. That’s seven times its proven reserves of 34 BCF.

“The opportunities are dramatic, given the company’s small size,” says Robotti. That would explain why Robotti recently took his already-large position in this company up another notch, at around $18 a share.

Panhandle Royalty also has 2,600 acres in the Woodford Shale in West Texas, and 7,300 acres in Wolfcamp in Chaves County, New Mexico.

The bottom line: It will take years to prove out the above scenarios, and they are no certain bet. But if they work out this stock could go up dramatically. Anyone buying Panhandle Royalty in this recent pullback should be willing to wait several years for that to happen.

Disclaimer
At the time of publication, Michael Brush had long exposure to Weatherford International, Southwest Energy, and Chesapeake Energy. 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.

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

2006-11-09T06:35:00.000-08:00

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

2006-10-26T10:11:00.000-07:00

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.

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

2006-10-05T07:33:00.000-07:00

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

2006-09-07T07:32:00.000-07:00

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

2006-08-17T06:48:00.000-07:00

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

2006-07-20T06:53:00.000-07:00

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

2006-07-06T06:52:00.000-07:00

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

2006-06-29T06:47:00.000-07:00

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

2006-06-01T08:46:00.000-07:00

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

2006-05-11T07:20:00.000-07:00

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

2006-05-04T07:52:00.000-07:00

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

2006-04-20T07:01:00.000-07:00

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

2006-04-12T21:01:00.000-07:00

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

2006-04-06T07:31:00.000-07:00

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

2006-03-30T06:46:00.000-08:00

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.

Keeping the Bad Guys at Bay in the Internet Jungle

2006-03-23T06:12:00.000-08:00

It’s a jungle out there on the Internet where so many bad guys lurk -- trying to invade corporate networks, drop spyware onto your hard drive, or trick people into revealing personal secrets.

So anyone who runs a corporate computer system knows it’s a top priority to protect networks from the bandits and pirates. Many small companies turn to SonicWALL (SNWL) for the products and software to get the job done.

In what may be a sign of how aggressive the bad guys are becoming, SonicWALL had a great 2005. Its stock rose above $8 from below $5.

But in a sudden reversal, SonicWALL shares gapped down and crashed hard to $6.50 earlier this year. The weakness came on news that SonicWALL purchased a smaller company in its space and issued earnings guidance that didn’t exactly jib with Wall Street expectations.

That’s when insiders stepped up to the plate and bought shares – once again. Chief executive Matthew Medeiros purchased $100,000 worth at $6.75 in late February. That brought total insider buying since early December up to $515,000. Much of it was above current levels – meaning you can now get the stock cheaper than where insiders recently saw value. The buying was all in the $6.75 to $7.90 range.

What do insiders see in the stock?

Cash hoard

SonicWALL came public in 1999, and it was smart enough to do a secondary near the peak for tech stocks, in March of 2000. The company still has about $240 million in cash left over, or around $3.70 per share. It’s using the money to buy back stock – always a good thing for shareholders – and acquire smaller companies to build out its product line.

Acquisitions don’t always work out. That may be one reason investors sold SonicWALL after it announced yet another purchase in early February – this time buying MailFrontier, a company specializing in messaging security.

But acquisitions are how SonicWALL plans to grow faster than the small-business information technology market, already projected to grow 7% to 10% a year.

Before MailFrontier, SonicWALL recently bought a company specializing in data backup and protection called Lasso Logic, and enKoo, which offers a kind of virtual private network technology.

As an outsider, it’s impossible to know whether these acquisitions will work out. But the solid insider buying while investors worry about these takeovers suggests they will be profitable.

The razor blade model

Next, SonicWALL is the kind of company Warren Buffet would like if he purchased tech stocks. That’s because besides all the cash, SonicWALL follows the “razor blade model.” Instead of selling razors, SonicWALL sells the hardware behind intrusion protection systems. Then customers can buy more add-ons with new features, and they have to come back each year for the software upgrades. SonicWALL believes it can do a better job of selling more razor blades – the software and add-ons.

International growth

Right now SonicWALL only gets about 32% of its revenue from foreign sales, while peers get 50% or more. The company hopes to change that. “We believe Europe and Japan present the most immediate growth opportunities for the company,” believes Sterne, Agee & Leach analyst Andrey Glukhov, who has a buy rating and a $9 price target on the stock. SonicWALL recently formed a sales partnership with Cannon, which should help in Japan.

The bottom line: Small Internet security companies face a tough challenge going up against giants like Cisco (CSCO). But SonicWALL’s products are cheaper, and easy to use. And if the company does a good job of digesting all the recent acquisitions and making them work, this stock could get back on track. “A breakthrough quarter may occur towards the back half of 2006,” says WR Hambrecht analyst Ryan Hutchinson. If he’s right – and insiders seem to agree -- now’s the time to buy, along with the insiders.

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.

Chasing the Blues from Your Portfolio

2006-03-09T06:58:00.000-08:00

The next time you hear people moan about a tough day, you might remind them they should at least be happy they don’t have a problem that doctors call psychotic major depression (PMD).

As the name suggests, this is a nasty mixture of depression and the delusional thinking or hallucinations that come from psychosis. It affects about 3 million people in the U.S.

Victims of this terrible ailment often have to be hospitalized. But there are no treatments approved by the Food and Drug Administration (FDA). The two that doctors use – a kind of electro-shock therapy or a one-two punch of antidepressant and antipsychotic medications – either have serious side effects or they don’t work well.

So psychiatrists and victims of the disease should be tuned in closely this year as a tiny and lightly-covered biotech company called Corcept Therapeutics (CORT) releases updates on studies on a drug that could offer a fix.

The company – whose researchers have links to Stanford University – believes that the compound mifepristone may help combat the disorder. Mifepristone, also used to terminate pregnancies, may work by blocking receptors for cortisol, a stress hormone that may spark PMD.

Corcept calls the drug Corlux. Early studies completed several years ago found that Corlux helps reduce psychosis in people who have PMD.

The current studies

Now, Corcept has two Phase III studies on Corlux in the U.S. and one in Europe. It also has several studies on safety and tolerability, re-treatment, and the use of Corlux against Alzheimer’s disease.

On the side, the company is working with Eli Lilly (LLY) to determine if Corlux can fight weight gain in people on olanzapine, a drug used to treat schizophrenia, bipolar disorder and dementia related to Alzheimer's disease.

The FDA has granted “fast track” status for Corlux in use against PMD. It has also offered a “special protocol assessment,” which basically means the FDA and Corcept have agreed in advance on how studies should be done so they are good enough for the FDA, at least procedurally.

Near-term catalysts

The key thing for investors right now is that Corcept may be releasing partial results from some of its Phase III studies throughout 2006. If they are positive, that will juice the stock.

The risk is that even though Corcept has other possible uses for Corlux – like treating psychosis associated with cocaine addiction – the company is in essence a one trick pony.

So by owning shares, you are essentially placing a bet that Corlux gets approved for use against PMD. This is what analysts call a “binary event,” which is sort of like betting on a coin toss – either you win or lose.

Many investors shy away from this proposition as too risky. Edward Nash, who follows the stock at Stifel, Nicolaus & Company, for example, has a hold on the stock, using the rationale against “binary events.”

Insider buys

But the significant dose of insider buying in this stock of late tilts the odds in your favor and suggests success is a better than a 50-50 proposition, I believe.

Since the end of January, insiders have purchased around $364,000 worth of the stock. True, chief executive Joseph Belanoff has been selling small amounts. But this is not too troubling to me because he owns 2.9 million shares.

Meanwhile, the company has around $30 million in cash – or about an 18-month supply if the recent burn rate is any guide. The company believes that’s enough to see Corlux through clinical development for the treatment of PMD.

How much is the market worth?

Nash, the analyst at Stifel, Nicolaus, doesn’t publish his model. But a report from him last autumn while he worked at Legg Mason Wood Walker – which was bought by Stifel, Nicolaus – shows he thought the company could earn $1.67 per share in 2008, if all went as planned. Put a conservative 15 time earnings multiple on that, and you’d have a $25 price on a stock that trades now for $4.90. A five bagger like that is usually enough to chase the blues out of your stock portfolio.

The bottom line: I can’t predict with any certainty that this scenario will play out. But earlier tests suggested Corlux works, and the insiders are lining up like that might be the outcome. As tempting as the potential upside is, however, remember to put just a small portion of your stock portfolio in a risky play like this – or less than 4%. In fact, Corcept is best suited as part of a collection of biotech companies you own with the hopes that the few big winners offset all the duds. Because I can predict this: There will always be many big losers in the biotech space.

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.

Custom Cancer Care With a Little Help from Giant Sea Snails

2006-03-02T06:06:00.000-08:00

One of the reasons we succumb to cancer so easily is that our immune systems are reluctant to attack it. Since tumors are a part of us, killing them is tantamount to self destruction, at least from the point of view of an immune system.

Wouldn’t it be great if you could trick the immune system into ignoring its natural reluctance to attack tumors? That’s the strategy used by a cancer therapy being developed by the biotech company Genitope (GTOP).

The process starts by identifying unique proteins on tumors and taking out a small sample. Those proteins are mixed with other proteins from giant sea snails living off the coast of California – of all things. They are grown into a brew that’s able to entice the immune system into attacking proteins like the ones on tumors.

The mixture is injected back into your body where it arouses the immune system to kill the cancerous tumors which have the protein targets. The giant sea snail comes into play because the protein it contributes is highly “immunogenic.” That means the immune system reacts strongly to it -- and anything attached to it.

“If you make enough of that target and activate the immune system against that target, you can apparently eliminate or at minimum control any of the residual tumors,” says Genitope chairman and chief executive Dan Denney.

Low cost manufacturing

This ingenious approach, which Genitope calls “MyVax,” has actually been known to work for a long time. Cancer patients were treated at Stanford University as long ago as the late 1980s. “About half of the patients immunized starting in 1988 have gone out very far in time and have never relapsed. It is looking like these patients may never relapse,” says Denney.

So why isn’t everyone using MyVax? The techniques originally used to produce the tumor protein brew were not commercially viable. That’s where Genitope comes in. The company has developed a system of “gene amplification” for growing the anti-cancer brew. The technology is called Hi-GET.

The target cancers

Genitope is in late stage, phase III, testing of MyVAx for use against follicular non-Hodgkin’s lymphoma (NHL), a cancer that begins in cells in the immune system. “Follicular” means the lymphoma cells are grouped in clusters or follicles in the lymph node. This cancer strikes about 55,000 people a year in the U.S. It is the second most prevalent NHL worldwide.

If tests prove beyond a doubt that MyVax works, Denney predicts it could be on the market in two years. WR Hambrecht analyst Patrick Flanigan estimates annual sales could reach to $500 million. But you won’t have to wait for two years for the stock to move.

As early as this summer, Genitope may present convincing data that MyVax works against lymphoma. It’s hard for anyone to know how these studies will turn out. But a Genitope director’s recent purchase of $212,000 worth of the stock at $8.50 suggests Genitope may be on the right track.

Other potential therapies

Genitope is also doing early phase testing of MyVax testing against chronic lymphocytic leukemia, another market that could be worth $500 million in annual sales. MyVax will also likely also be tested for use against other kinds of lymphoma and NHL.

The company is also developing monoclonal antibodies – a class of therapy made famous by Rituxan, Avastin and Herceptin from Genentech (DNA). Success of drugs like these has helped Genentech stock more than double in the last year.

Monoclonal antibodies work by attacking tumors directly and convincing them to commit suicide, or helping other defense mechanisms in the body kill them off.

Cash levels

Genitope just raised $58 million in February -- bringing cash levels to around $148 million. That should be enough to last well into 2007, says chief financial officer John Vuko. The company is spending tens of millions of dollars right now to build a new manufacturing facility and headquarters.

No sure bet

As we know by now, biotech companies are always a crap shoot. Cancer “vaccine” companies like Genitope in particular are viewed with suspicion because of the difficulty in proving that cancer vaccines work. Keep in mind, however, that these aren’t really “vaccines” in the traditional sense because they are used to combat an ailment that has already set in – instead of neutralizing one ahead of time.

For what it’s worth, Brean Murray, Carret analyst Jonathan Aschoff has a medium-term price target of $21 on Genitope. He bases that on projections that Genitope could make $2.11 per share in 2009. But we also know biotech companies can easily flop.

The bottom line: This one looks promising. But you should only own it as part of a basket of biotech companies you hold with the hope that a few big winners will offset all the losers.

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.

Putting the World in Your Pocket With a Cell Phone

2006-02-23T06:57:00.000-08:00

In the beginning, cell phones were just phones. And that was good enough. Now they take pictures and shoot short video clips. Or they let you play games and surf the net to download cool ring tones.

Down the road, your phone will basically be a full-fledged multimedia center – sort of like a TV, DVD player and iPod wrapped up into one. It’s all part of the evolution of mobile phone operators as they morph from being simple phone service providers to outright media companies.

There’s good reason for this change. With competition knocking the profit margins out of basic phone service, these companies know they have to move into higher-margin media content to thrive. Besides, people will always want cooler toys.

Behind the scenes, however, these new features are putting fresh demands on the guts of the cell phone. In particular, memory and processors will have to become a lot more robust and flexible.

Where will all the computing power and storage come from? Right now, industry observers are watching as phone providers re-work combinations of different kinds of memory to get the job done. One format, called NOR, is good at storing application code. Another, called NAND, is a lot slower, but it is cheaper and good at storing data – like songs inside portable music players.

A third way

A chip company recently spun off from Advanced Micro Devices (AMD), meanwhile, has been working hard using a proprietary technology to find a third way. Known as Spansion (SPSN), the company is applying a technology called MirrorBit, to create a hybrid of NOR and NAND. The hybrid is called MirrorBit ORNAND.

Spansion believes MirrorBit ORNAND is faster and more reliable than current forms of memory used in cell phones. So it should be better at supporting multimedia features. The technology is also “scalable,” which means handset designers can scale the flash memory they order depending on how complex they want their phones to be.

Industry analysts and investors are not so sure about all this. In a recent note on Spansion, Deutsche Bank Securities Ben Lynch wonders whether MirrorBit ORNAND will be a success. He notes that the new approach is only now being tested by customers with no real public feedback to date. Many investors seem to share the uncertainty. Spansion was spun out in December, but to get the deal done banks had to lower the offer price, says Lynch.

Buoyant insiders

Insiders, in contrast, are fully confident. “We had to invest a ton of money without having instant gratification,” chief executive Bertrand Cambou told me in a recent interview. In short, he says, the company has been in research and development mode, with little revenue to show for it. But all that is about to change, he believes. “Now we are at a position where we are ready to blossom and explode as a powerhouse in this space,” says Cambou.

The cynic’s view, of course, is that chief executives are always bullish on their business. But Cambou is a bull who puts his money where his mouth is, and that’s exactly what we look for here at Insiders Corner.

Shortly after his company came public, he purchased $653,000 worth of the stock at around $13. A director also made a big purchase at about $15.60 recently, rounding out the total insider buying so far to $1 million. That’s a good signal.

Of course, not every cell phone user is going to want to put a media center in his pocket. But many will. How many? A cell phone market strategy consultant called iGillottResearch estimates that in four years, one in six handsets will have processors, memory and operating systems with computing capabilities similar to those found in laptops.

But even lesser phones can use Spansion’s technology – and growth in the sector should remain robust, predicts iGillottResearch. The firm estimates that 1.2 billion handsets will be sold in 2010, compared to 808 million last year. Spansion memory will also be used in automobiles, smart cards, and other devices beyond cell phones.

The bottom line: The best time to own a tech company is right in front of a new product cycle – especially one linked to a hot market – before everyone else catches on. That’s what you have with Spansion and its memory product for cell phones turning into media centers. Of course, you never know if a new technology will really be a hit. But when insiders step up and place big bets with their own money, it’s a powerful sign. I’d buy right hear near $15 per share. But with so much volatility in the chip sector of late, and the natural volatility of recent offerings, you might be able to get the stock lower, too.

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.

Reloading the Insider Matrix

2006-02-16T07:09:00.000-08:00

As any investor can tell you, the purpose of a stop loss order is to set an automatic trigger that gets you out of a stock without emotional drama when it starts to sink – so your losses don’t multiply.

It’s simply too easy to trick yourself into staying with a losing position that chips away at your balance daily – as you cling to hope.

That’s why, as a rule, we dump positions in the Insiders Corner portfolio whenever they decline 25%. No questions asked. So it hardly makes sense to circle back now and reopen positions that have stopped out.

But I am going to do it anyway with two stocks that tanked in the past few months and stopped out: Peregrine Pharmaceuticals (PPHM) and Fossil (FOSL), a retailer.

Peregrine Pharmaceuticals

We suggested Peregrine last summer at around $1.25 (click here). But then the stock drifted steadily lower to around 90 cents a share, stopping out of our model portfolio.

The stock recently snapped back to life and surged to about $1.50, apparently on exactly the kind of news flow we were expecting. This suggests more upside -- because it’s easy to map out similar catalysts this year. Besides, the potential for this company’s main compound in fighting many common viruses and cancers is huge.

Peregrine’s a novel compound seems to work like this. Essentially, when cells in our bodies get infected or altered by viruses and cancers, they change in the following way. As cells get stressed by these ailments, they get confused about some of their maintenance tasks. One result is that phospholipids normally found on the inside of cell membranes wind up on the outside.

This has two key implications. When viruses leave the cells they’ve infected, bits of the membranes from those cells envelope those virus particles. The exposed phospholipids on those membranes serve as targets for Tarvacin, Peregrine’s lead compound.

It’s similar with cancers. Stressed by cancer, the cells in blood vessels feeding cancer cells also get confused about their maintenance tasks. So the internal phospholipids end up on the outside of the cells. Bingo, another target for Tarvacin.

Tarvacin works essentially by attaching to problem cells and suppressing the signals from them that throw off our immune system. This way, our immune system can key in on the problem cells and destroy them. “Tarvacin reprograms the body’s own natural defenses to recognize and fight disease,” says Peregrine chief executive Steven King.

Tarvacin could work against a broad range of viruses, including the ones that cause influenza and Hepatitis B and C, herpes, West Nile, Dengue, HIV, SARS, avian flu and many of the potential bio-terror “hemorrhagic” viruses, like Ebola. Early studies in animals also show that Tarvacin acts as a kind of vaccine against further infections of the virus it was originally used to treat.

Tarvacin may also work against several kinds of cancer, so the potential is huge here, too. Blockbuster anti-cancer therapies like Avastin and Rituxan from Genentech (DNA) produce billions of dollars a year in revenue, and Tarvacin could be in this league.

Peregrine also has a compound it is testing for brain cancer, called Cotara. It seems to work by gathering in dead cells inside tumors and serving as a kind of magnet and anchor for radiation treatments that fix to the Cotara, destroying tumors from the inside out.

Peregrine jumped to $1.50 per share from about 90 cents in early January, apparently on news that:

For the rest of the year, several clinical milestones may draw further interest in this company. They include:

This is a long-term buy and hold that requires patience because all of these therapies are still far from commercialization. But the potential is big, so it makes sense to tuck away some of this stock in your portfolio.

Fossil

Teen retailer Fossil is still not doing press interviews, so it’s harder to get a grip on out what might turn it around. Normally that kind of reticence is a big red flag.

But the insider whose multi-million dollar purchases originally put us in this stock (click here) is buying huge amounts in the recent pull back. The buying is so big I’ll reload this position, too, in a kind of blind faith that managers will get this retailer back on track.

Why have this kind of blind faith in investing? Because typically, management teams who once figured out how to design hot retail products for teens can figure out how to do it again after a cold spell. Just look at the ups and downs of retailers like Abercrombie & Fitch (ANF) and American Eagle Outfitters (AEOS) over the years.

The recent buying came when chief executive Kosta Kartsotis stepped up and purchased $2.4 million worth of the stock in the $17.60 to $18.30 range after the shares dropped about 25% following a February 2 earnings warning.

The bottom line: Biotech companies and teen retailers are notoriously risky. Even when insiders buy huge amounts, it’s no guarantee the stocks will go up. But Peregrine has products that may be in the same league as the ones that rewarded Genentech shareholders nicely and the Fossil chief executive is plowing so much money into his stock at these levels, both are worth a shot as long-term plays.

Disclaimer

At the time of publication, Michael Brush owned shares of Peregrine Pharmaceuticals. 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.

Snipping Genes to Cure Diseases

2006-02-09T07:45:00.000-08:00

When U.S. President George Bush asked Congress to write laws that would ban “human-animal” hybrids last week in his State of the Union speech, it was a chilling reminder of the more bizarre implications of the genetic research going on around us.

So it’s comforting to remember that the miracles of genetic modification are also being tapped to protect human life and treat diseases.

A good example of these efforts is a Cambridge, Mass.-based company called Alnylam Pharmaceuticals (ALNY), where a director recently bought a big slug of stock, worth $1.3 million.

Running interference

Alnylam – named after a star in the constellation Orion – works in an area of science called “RNA interference.”

You may remember from biology classes that RNA, or ribonucleic acid, is a chemical that plays a role in the creation of proteins inside cells. Since most ailments can be traced back to the production of proteins, knowing how to stop RNA from making proteins means you have the keys to preventing all kinds of diseases.

This technique is called RNA interference, or RNAi for short, and it’s the main focus at Alnylam. “What we can do with our RNAi technology is stop those diseased proteins from being made in the first place,” says Alnylam chief executive John Maraganore.

RNAi works by slicing certain genes in our bodies, to disable RNA from producing specific proteins. It can also be used to attack viruses by disabling the genes inside of them that help the viruses reproduce.

If RNAi therapies ever see the light of day, patients will likely take them via regular injections, or inhalers.

Embarrassment of riches

Since proteins are at the root of most diseases and even problems like chronic pain, the potential here is huge. “There could be a whole new class of drugs based on RNAi,” says Maraganore. “We have an embarrassment of riches in the different diseases we can tackle.”

Here’s a brief look at some of the main ones Alnylam is working on first.

* Bird Flu

No one knows whether the H5N1 avian flu virus will ever make the jump to humans in a way that causes widespread problems (http://moneycentral.msn.com/content/P132582.asp). But it might. That would be devastating for us. But it could light a fire under Alnylam stock. That’s because the company believes its RNAi can neutralize the bird flu virus. Alnylam hopes to file an investigational new drug (IND) application with the Food and Drug Administration as early as the second half of this year in this area.

* Respiratory Syncytial Virus (RSV)

RSV is the leading cause of lower respiratory infections in infants. There are millions of cases in the US each year. Alnylam recently started enrolling patients for Phase I trials of a potential RSV therapy, to test for safety and dosage levels. It could release results in the first half of this year. The therapy could work by delivering a drug to the lung to neutralize a gene in the virus, preventing it from reproducing.

* Neurological diseases

Since ailments like Parkinson’s disease, Alzheimer's disease and cystic fibrosis can all be traced back to the production of certain kinds of proteins inside cells, RNAi might work against these problems, too. Alnylam is also in the early stages of trying to apply the technology to help regenerate nerves damaged in spinal cord injuries or stop certain kinds of pain.

Success factors

So many biotech companies sound so promising when you talk with the scientists, it’s hard to single a few out to invest in. I think Alnylam makes the cut for three reasons.

First, Alnylam has three key partnerships that suggest big drug companies believe in their tech. The partnerships are with Merck (MRK), Medtronic (MDT), and Novartis AG (NVS). These alliances have brought in about $100 million for Alnylam. Novartis owns just under 20% of the stock.

Next, Alnylam has some of the key scientists in the space on its team. They include: Thomas Tuschl who is the head of the Laboratory of RNA Molecular Biology at Rockefeller University, and Phillip Sharp who is the director of the McGovern Institute for Brain Research at the Massachusetts Institute of Technology. The company may ultimately lay claim to much of the intellectual property and patent rights behind RNAi.

Third, Paul Schimmel, a director, bought $1.3 million worth of the stock at the end of January. Insiders are often wrong in biotech, but that’s a significant bet.

The bottom line: Many biotech companies with a lot promise flame out. And this is a company that lost 51 cents a share in its last reported quarter. In short, it has a long way to go to profitability. But it’s got the stamp of approval of some major pharma companies. And several catalysts this year could move the stock. They include: the completion of Phase I studies on the RSV drug and the launch of Phase II trials here; the release of data from primate research on other therapies; and more funding for bird flu work and possible regulatory advances here. If you buy, just remember that early stage biotech companies are most suitable for investors with a long-term view.

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.

Get a Piece of Every Transaction with This Fast-Growing Credit Card Processor

2006-02-02T07:27:00.000-08:00

It’s every dreamer’s get-rich-slow scheme. Figure out a way to take a small piece of lots of transactions that happen daily. Then sit back on the beach and let the money roll in.

I’m not sure how much time CAM Commerce Solutions (CADA) chief executive Geoffrey Knapp spends on the beach. But he seems to have figured out the first half of the equation.

His company spent years after starting up in the 1980s selling payment processing systems to retailers. That end of the business has been hit or miss lately.

But another side of the business is hot. It’s a software system retailers can incorporate into their payment systems that helps them in two ways. First, it allows them to get rid of that separate box you use to swipe your credit card. Instead, your card gets read by the store’s register.

Second, there’s now only one transaction – the register both reads your card and rings up your purchase in one shot. This means at the end of the day retailers don’t have to audit records of sales through two systems to be sure they all match up.

“With ours it is all one system,” says Knapp. “You eliminate all that extra equipment and all the auditing each day.” CAM Commerce takes a small piece of each transaction, sharing it sometimes with other vendors of payment systems if they were the ones who installed systems using CAM Commerce’s software.

Snapping it up

This might be a little more than you care to know about retail payment systems. But retailers themselves are snapping up X-Charge, as the system is called. In the September-ending quarter, X-Charge sales grew 78%.

CAM Commerce has other lines of business – like complete payment processing systems – so overall revenue isn’t moving up that fast. But the good news is that margins are higher on the X-Charge revenue, so as it grows, earnings move up a lot.

How much?

B. Riley & Co. analyst Justin Cable doesn’t cover the company. But he follows the sector so he has a model for CAM Commerce. He’s looking for overall revenue growth of 9.7% this year and 13.4% next year.

But because revenue should grow faster than costs, earnings per share could grow 75% this year and 57% next year. That means pro forma earnings per share could be 77 cents this year and $1.21 next year, compared to 44 cents last year. The company also has a forward annual dividend of 56 cents a share, for a dividend yield of 2.4%.

Despite this kind of prospective growth, CAM Commerce looks moderately cheap. If you strip out the company’s $5.47 per share in cash, the company trades for about 2.7 times sales, at $23.50 per share. Sage, a big UK software company, recently paid 5.1 times sales for Nashville, TN-based payment processor Verus Financial Management.

Insiders have purchased $2.6 million worth of stock since last April, and this is only a $65 million market cap company. So that’s huge.

About $2.1 million came from a beneficial owner (someone who owns more than 10% of the stock) who has close contacts with top management. Knapp has purchased $442,000 worth and now owns over 12% of the shares.

The bottom line: Insiders admittedly bought the stock much lower. Knapp’s highest purchase was at $17.50 and the beneficial owner purchased most of his stock under $15, but his highest purchase was $22.80. In short, the stock has been strong of late – probably in anticipation of good earnings news on Feb. 14 when CAM Commerce reports – so we are a little late to the story. But there is still probably significant upside ahead, and I’d expect the stock to be strong on quarterly earnings news. So I would buy right now.

A Tiny Way to Play Something Huge: The Nanotech Promise

2006-01-26T06:26:00.000-08:00

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.

Make Your Day with this Insider Signal on Steroids

2006-01-18T21:14:00.000-08:00

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.

Look for Profits in This “Everyman’s IPO”

2006-01-11T20:49:00.000-08:00

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.

Globalize This!

2006-01-05T06:12:00.000-08:00

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.

Five More Tax Loss Selling Plays to Buy Before the New Year

2005-12-21T12:56:00.000-08:00

By Michael Brush
December 21, 2005

Only seven more shopping days left – to buy tax-loss selling candidates.

These are the 2005 losers that investors are dumping now so they can ring up tax losses before the year ends. They’re shopping for tax losses to offset 2005 capital gains in stocks.

The pressure they’ve been putting on stocks can create bargains -- especially if insiders are buying at the same time.

To find some of the best potential tax loss selling plays, I scanned the small-cap insider buy stocks to find the ones that are down the most for the year. This suggests tax loss selling is pressuring these stocks now as the year comes to a close. But they are potential winners for 2006 because insiders are bullish.

Here are five more to add to a list of five I wrote about in my last column here: click here

Tercica (TRCA) shareholders got a “baaa humbug” from the Food and Drug Administration a few days ago when the regulators took away marketing exclusivity for a growth hormone product. The stock got hammered, falling to $7 from $10. Then two insiders then stepped up and bought over $1.3 million worth of the stock. That’s pretty bullish!

Avanex (AVNX) shares have fallen to $1.11 from $3.50 this year, leaving plenty of shareholders disgruntled. More of them will be selling shares of this optical networks equipment provider as the year winds up to generate tax losses. But the chief executive recently bought $179,000 worth of stock at 90 cent a share – signaling value near current levels. For a brief walk down memory lane, consider that this stock once traded for $270 per share in the tech bubble days.

Inergy (NRGY) stands out among energy stocks because it is trading near its lows for the year. In contrast, most energy stocks have posted solid gains. The company processes and distributes propane and other derivatives of natural gas in the Midwest and Southeast. Insiders have been buying in the $26.50 to $28.90 range since the stock broke down. At recent levels this company -- which is a limited partnership -- offers a dividend in the 7.8% range. Be warned: Limited partnerships create special complications at tax time which you will have to deal with if you own this stock.

MCG Capital (MCGC), at $14.50, has an entire shareholder base that is looking at losses for 2005. That has to contribute to selling pressure as the year closes. But insiders, including the chief executive, are buying aggressively in the low $14 range. Down here, the company pays a hefty 11% dividend. MCG Capital provides financing and advisory services to smaller companies, especially in the media and telecom space. A.G. Edwards recently started coverage of the company with a buy rating.

MDC Partners (MDCA) shares have fallen to $6 from $11 since the start of the year. It’s been a long and grinding decline for shareholders of this Toronto-based company which provides marketing, and offers products and services that help create secure transactions. So there’s bound to be downward pressure on the stock now from investors who are throwing in the towel for the year. Down here, the stock trades cheap. It goes for .35 times sales and less than book value. Insiders, including the chief executive, recently purchased substantial amounts in the $6 range – or near current prices.

The bottom line: Buying these stocks now puts together two strategies that can give you an edge in the market: Picking up tax loss selling candidates and following the insider cues. I think all of these are buys right now for decent gains as a group in 2006 or beyond.

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 Tax Loss Selling Candidates to Put in Your Shopping Bag This Holiday Season

2005-12-20T07:34:00.000-08:00

By Michael Brush
December 20, 2005

We can’t let the year go by without applying our insider intelligence to a regular end-of-year activity for investors and traders alike: Picking up beaten down tax loss selling candidates on the cheap.

At the end of each year, many investors sell the year’s losers and “take losses” so they can match them up against gains and reduce their tax bills. This puts unusual downward pressure on stocks, pressure which may ease as the new year begins.

As usual when buying beaten down names, the trick is to avoid the notorious “value trap,” that is, the purchase of beaten down stocks that look cheap – but only stay cheap or get cheaper. How do we know which beaten down stocks from 2005 actually will come back?

We don’t.

But buying those which the insiders have been snapping up will definitely tilt the odds in our favor.

To find this season’s best tax loss selling candidates, I took two steps. First, I’ve scanned the smaller cap names to find stocks with some of the best insider buying profiles in recent weeks, according to my system. From that group, I selected the stocks whose charts look the ugliest for the year. A stock that’s now trading at or near its low for the year has the most shareholders underwater for the year. So they are more likely to be selling in the final days of the year to generate those tax losses.

Some of these names could begin to spring back right away in December once the tax loss selling pressure eases, and fresh 2006 retirement account money starts pouring into the market, looking for a home.

But as usual when following the insiders, it’s better to buy these instead with an eye for gains at some point in 2006 or 2007 – because insiders by nature tend to buy well ahead of the trends they think they see coming. In short, be patient with these names. But if you buy a group of them, the odds are good you’ll see a payoff that beats the market with ease over the next 18 months to two years.

Here’s this year’s crop of tax loss selling candidates.

GTX (GTXI) has fallen so hard this year, virtually anyone who purchased shares of this biotech company is now underwater. That’s a lot of potential sellers. But the buyers late this year include a director who purchased $744,000 worth of the stock in December. Directors also purchased over $10 million worth of stock back in October as part of a follow-on offering.

GTX is working on products that may prevent prostate cancer, treat the side effects of androgen deprivation therapy for advanced prostate cancer, and help with weight loss and muscle wasting associated with severe burns and cancer.

Chemtura Corporation (CEM), a specialty chemical company, saw its shares blow up in September when it announced poor results for the third quarter. The stock has rebounded from the lows it hit in October, but many people who bought this year are still looking at losses. Their selling is putting downward pressure on the stock right now. Insiders, however, have been actively buying in the $12 range – or near current levels.

Restoration Harware (RSTO) was a stock I featured here back on April 20 at just the right time (click here for article). Within three months this upscale home furnishings retailer had gained almost 50%. But now it’s back down to levels near where I first wrote about it, because of a slowdown in sales growth. Insiders, however, are buying again in a big way. One director, for example, has purchased about $4.8 million worth of the stock in the $5.40 to $6.50 range in the pull back. That’s a bullish signal if there ever was one. The retailer looks cheap again, with a
price to sales ratio of .42.

ActivCard (ACTI), which makes digital identity systems, has had such a tough year the stock is now trading down near its cash-per-share levels. How much lower can it go? After all, with $3.49 per share in cash, managers could close the company and hand over all the money to shareholders without causing them much damage – because the stock recently traded for $3.58. One insider recently plunked down $759,000 to buy 215,500 shares. The company is changing its name to ActivIdentity.

UTStarcom (UTSI), a major supplier of wireless and DSL equipment to Chinese telecommunications companies, has gotten pummeled this year. Shares have been slammed to $8.45 from $22. Around $8, a director bought nearly $400,000 worth of stock. The shares are cheap, at .33 times sales.

The bottom line: Buying these stocks now puts together two strategies that can give you an edge in the market: Picking up tax loss selling candidates and following the insider cues. I think all of these are buys right now for decent gains as a group in 2006 or beyond.

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.