Cancer Drug IPO Sees Strong Insider Interest

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

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

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

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

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

Insiders vs. the market

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

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

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

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

Cancer drugs

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

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

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

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

Inflammatory disease treatments

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

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

A long ways to go

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

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

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

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

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

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

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

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

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


• Integrated Electrical Services (IESC), an electrical contractor


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

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

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

Tix (TIXC)

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

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

Business is booming.

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

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

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

Integrated Electrical Services (IESC)

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

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

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

FRMO (FRMO)

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

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

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

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

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

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

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

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

Look Out Energizer Bunny, Here Comes the Fuel Cell Battery

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

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

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

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

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

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

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

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

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

Strong partnerships

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

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

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

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

End of the road for lithium-ion

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

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

Pure methanol

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

Bigger potential upside

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

Cash burn

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

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

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

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

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

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

An Unconventional Energy Player in the Driver’s Seat

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

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

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

Is there any end in sight?

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

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

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

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

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

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

Panhandle Royalty

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

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

Cooperative beginnings

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

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

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

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

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

Fayetteville and Woodford

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

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

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

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

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

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

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

Disclaimer
At the time of publication, Michael Brush had long exposure to Weatherford International, Southwest Energy, and Chesapeake Energy. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorI deas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp . InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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

By Michael Brush
Exclusively for InvestorIdeas.com
November 09 2006

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

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

Bad move.

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

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

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

Let’s take it.

A second chance

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

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

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

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

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

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

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

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

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

More than just housing

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

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

Insulation

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

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

Roofing and Asphalt

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

Other building material

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

Composites

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

• historically low interest rates


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


• continued big deficit spending by the federal government.

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

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

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

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

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

Brand-X Airplane Parts Maker: Cleared for Take Off

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

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

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

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

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

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

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

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

Putting up resistance

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

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

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

Wind at its back

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

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


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


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

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

The insider buying

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

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

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

An options overhang

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

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

An unanswered question

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

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

Disclaimer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Show Me

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

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


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


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


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

Lukewarm rating

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

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

Potential Catalysts

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

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

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

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

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


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


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

Gold prices

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

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

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

These forces should support demand as well:

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


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


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


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

Follow up

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

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

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

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

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

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