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

By Michael Brush
June 29, 2006

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

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

It’s easy to see why.

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


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


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

Insiders still buying


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

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

Here is the plan.

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

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

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

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

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

Buying the blow up

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

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



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

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

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

Five More Stocks Insiders Like in the Current Weakness

By Michael Brush
June 01, 2006

Is it over yet?

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

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

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

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

Two energy plays

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

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

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

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

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

Two titanium plays

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

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

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

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

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

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

Banking on computer systems

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

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

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

Disclaimer

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

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

Complete Your Energy Stock Portfolio With This IPO

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

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

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

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

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

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

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

The Full Monty

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

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

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

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

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

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

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

Disclaimer

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

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

A Natural Hedge Against the High Cost of Filling Your Tank

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

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

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

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

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

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

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

A Quick Overview

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

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

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

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

Green Plains Renewable Energy

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

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

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

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

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

Risks

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

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

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

Hedging machines

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

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

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

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

Too much supply

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

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

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

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

A Wireless Hookup for Your Portfolio

By Michael Brush
April 20, 2006

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

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

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

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

Huge insider buying

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

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

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

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

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

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

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

Other products

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

Going against the grain

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

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

A wild horse

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

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

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

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

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

Disclaimer

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

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

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

By Michael Brush
April 13, 2006

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

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

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

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

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

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

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

Can you see me now?

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

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

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

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

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

Big-picture trends

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

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

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

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

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

Disclaimer

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

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

How to Trust but Verify in the Digital Age

By Michael Brush
April 06, 2006

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

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

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

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

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

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

That’s where Authentidate comes in.

Home medical equipment

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

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

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

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

Some clouds

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

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

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

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

Disclaimer

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

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

The FedEx of Digital Content

By Michael Brush
March 30, 2006

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

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

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

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


Big insider bet

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

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

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

A work in progress

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

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

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

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

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

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

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

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

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

Disclaimer

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

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

Keeping the Bad Guys at Bay in the Internet Jungle

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

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

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

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

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:

* Tarvacin controlled the spread of pancreatic cancer in mice
* Peregrine enrolled patients months ahead of schedule in a study on how Tarvacin works against Hepatitis C
* the Defense Department announced a grant to support research on how well Tarvacin works against prostate cancer.

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

* advances in its study on how well Tarvacin works against Hepatitis C
* completion of enrollment in studies on how well Tarvacin and Cotara work against cancer
* an expansion in the list of viruses that Tarvacin may work against

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

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

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

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

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”

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.