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4 techs insiders are buying
New lines of business (or patience enough to outlast rivals) inspire execs at these former belles of the bubble to pull out their own checkbooks.
By Michael Brush
Who could forget the high-flying stocks of the tech bubble? They had flashy names like DoubleClick (DCLK, news, msgs) and Digital Lava (DLVAZ, news, msgs). They were going to make you millions off the Internet, the cell-phone craze or some other techno-phenomenon. And their executives tended to become remarkably wealthy, mainly by selling the lofty shares of their fashionable companies.
Long after the bubble deflated, tech insiders as a group today remain much more eager to sell their own shares than to buy them. But a few notable tech companies are rife with insider buyers. For investors, this is a dynamic that's well worth watching, especially if the stocks been rising. In fact, a little digging reveals that many of these insider buyers have good reason to fork over cash for their companies' stock, and you may want to consider the stocks, too.
Dont expect that these bubble darlings will ever see their 2000 levels. The old markets not only arent coming back now, they are never going to be at the level they were at before, at least not in my lifetime, proclaims Louis Tomasetta, the CEO of Vitesse.
That said, insider-buying trends help reveal that there are some legitimate bargains among tech stocks now that the market has fallen a bit. Heres a look at four key tech names.
Corning rides flat-panel trend
Corning (GLW, news, msgs) directors William Smithburg and Eugene Sit bought $469,000 and $314,000 worth of company stock in May and February in the $11.24 to $12.56 range. Here's why they can expect those purchases to pay off.
As a leading vendor of the fiber-optic cable that makes up the Internet backbone, Corning was the poster child for high-flying tech stocks during the bubble. Glowworm, as its affectionately known among traders, peaked above $110 in 2000 after a dizzying ride that started at $15 in early 1999. Its bottom was $1.10 in October 2002. Its now at about $12.11.
Corning strayed far from its roots during those heady days. After all, it was founded in 1936 as Corning Glass Works and is still headquartered in Corning, N.Y. Now, it has come full circle; its a glass company again. But not just any glass company, and thats the key to where Corning shares will go from here.
Corning gets about half its revenue from flat-panel glass used in hot consumer items such as notebook computers, liquid-crystal display (LCD) televisions, flat-panel desktop monitors, cell phones and hand-held devices. Corning thinks robust demand for flat-panel glass should help bring bubblelike revenue growth of 50% this year. But UBS analyst Nikos Theodosopoulos thinks it could be more like 70%.
The story here is simply that they are not the same company that they were, says Marc Klee, whose American Fund Advisors runs the John Hancock Technology Fund (JHTIX) and owns Corning shares. It was an optical-fiber company back in the bubble. Today, the real story is that they are a leading manufacturer of flat panels.
Indeed, absolutely none of that 50%-to-70% revenue growth this year will come from the infamous fiber-optic business. Our expectations are we may see some signs of growth here in 2005, says Dan Collins, who handles corporate communications for the company. This business makes up about 30% of revenue at Corning.
More on insider trading at MSN Money
Beyond that, Corning will get another kick once environmental rules start requiring diesel vehicles to use catalytic converters. The rules will be phased in between 2006 and 2008 in the United States and in Europe, where about 40% of cars run on diesel. Corning makes ceramic parts used in catalytic converters. Corning could be a multi-legged story down the road, and these are the kinds of companies that turn into blue-chip stocks, says Klee.
Vitesse finds niche in speedier 'Net
While Corning caught fire during the bubble because it sold fiber-optic cable, Vitesse (VTSS, news, msgs) took a similar ride because it was early to market with cutting-edge chips that powered high-speed Internet traffic. Just like Corning, the stock was creamed, dropping from a March 2000 peak of $106 to 64 cents in October 2002. Its now at $5.27.
Fortunately for Vitesse, even before the market fell apart, the company was branching out into new lines of business that are now healthy -- and carrying the company.
Once the bubble burst, all the long-haul business disappeared, says Vitesse CEO Tomasetta. So if we had not started this process of moving into other areas, I dont know how we would have survived.
Vitesse now gets most of its revenue and its growth from chips used in high-speed Ethernet gear that speeds up the flow of data in two key areas. These guys have gotten a lot of design wins, says Peter Conrad of Kopp Investment Advisors, which owns Vitesse shares in its Kopp Emerging Growth Fund (KOPPX). They have been very lucky and astute in repositioning the company.
First, Vitesse makes chips that speed up Internet traffic in metro networks surrounding urban areas. It's complicated to explain, but Tomasetta sums it up this way: We developed new technology that does dynamic bandwidth allocation on the fly. Second, in the business space, Vitesse makes gigabyte Ethernet switches and other devices that help with local area network (LAN) traffic and storage. In both areas, its all about using the high-speed Ethernet to move data faster. Ethernet is the next wave, says Tomasetta.
Pacific Growth Equities analyst Sandy Harrison worries that Vitesse is about to run into trouble because it is moving into product lines that carry lower profit margins, particularly in the business space, where it will go up against tough competitors such as Marvell Technology (MRVL, news, msgs) and Broadcom (BRCM, news, msgs).
But Vitesse insiders do not seem to share that concern, as they have been loading up on shares in their company. Tomasetta bought $194,000 worth in April for around $5 or less. CFO Eugene Hovanec has purchased $397,000 worth in the past three months at prices ranging from $4.52 to $6.94. And James Cole, a company director, and Ira Deyhimy, a vice president, purchased $50,000 and $97,000 worth in April and October.
Three-Five branches out
During its heyday in 2000, Three-Five Systems (TFS, news, msgs) was a high flier, thanks to a hot little niche -- selling cell-phone displays to Motorola (MOT, news, msgs). That represented as much as 80% of the companys revenue at the time. The stock had peaked at $80.75 in March 2000; the low was $3.62 in October 2002.
So not surprisingly, Three-Five Systems crashed along with the cell-phone business as the bubble burst. But with the help of a few acquisitions in the past two years, the company has morphed into a more diversified provider of electronic manufacturing services (EMS). It now gets 80% of its revenue from 10 customers, and it serves clients in six different industries.
The company still has a focus on displays, and it is aiming to build its business into two areas that may provide the lions share of profit growth, since these areas produce higher profit margins than those earned by the typical EMS company.
First, casinos are interested in putting displays on gambling devices such as slot machines to track and communicate with high rollers when they swipe their smart cards. Second, Three-Five Systems is getting U.S. Food and Drug Administration approval to make medical equipment used in life and death situations, known as Class III medical devices.
Their whole strategy is to become a specialty electronic manufacturing service company, leveraging their core competency in display technology, says Graham Tanaka of the Tanaka Growth Fund (TGFRX). I think it is a good move. The company has no debt, which is unusual in the EMS space.
Sell-side analysts still have hold ratings on this stock, waiting to see how the transformation plays out. But insiders arent waiting. Consistent insider buying since last November includes purchases by CEO Jack Saltich and CFO Jeffrey Buchanan, in the $5 range, worth $170,000 and $9,000, respectively. All told, insiders have bought over $320,000 worth of stock so far this year -- not an overwhelming figure, but a fairly strong signal of management faith in the company's current strategy.
Amkor big in chip-making's 'back end'
Unlike Corning, Vitesse and Three-Five systems, Amkor (AMKR, news, msgs) hasnt really morphed into anything dramatically new. Instead, the company is simply staring at a couple of very positive long-term business trends. So when its shares plunged 42% in late April to $8, it wasn't terribly surprising that insiders stepped up aggressively. They bought $2.5 million worth of stock in the $8-to-$9 range in late April and so far in May. The company had come back from a low of $1.20 in August 2002 after peaking at $64.56 in March 2000.
To understand the trends that will power this company, you first need to know that Amkor gets 90% of its revenue by packaging chipsets for semiconductor companies. (It gets the other 10% from testing chips.) Simply put, packaging means encasing chips in plastic coatings in a way that allows them to connect with system boards; the trick is putting all their electrical properties to use without overheating. Amkor has almost 30% of this market, known as the back end of the chip market as opposed to front end wafer production.
This is a growth area for two reasons.- Many integrated chip companies -- which means they do both back- and front-end production -- cut back on investing in the back end of the business during the downturn. Now that demand has snapped back, its easier for them to outsource to Amkor to keep up with demand.
The outsourcing trend is accelerating, says Jeffrey Luth, who handles corporate communications for Amkor. The company recently entered into a long-term agreement with IBM (IBM, news, msgs) that will generate an estimated $1.5 billion in revenue through 2010. The agreement could lead to more business with IBM partners that dont currently use Amkor, like Broadcom and Nvidia (NVDA, news, msgs).
- Big chipmakers also have to turn to Amkor because packaging is much more complex than it used to be. Because of the ongoing miniaturization in cell phones and cameras, you need to cram more functionality into a smaller space, says Luth. Its also a matter of integrating logic and memory, which makes packaging more complex, as well.
Following the earnings miss in April, analysts downgraded the stock, contributing to a decline that now makes the stock look cheap. At $9.49 per share, Amkor trades at about nine times forward estimates of $1.10. That is well below a group average of 11.
And it may be one reason directors and officers -- including Winston Churchill Jr., James Zug, Susan Kim, Joo Ho Kim and John Brown Neff -- have bought up so much of the stock lately.
Beware of head fakes
If you try to look for buy signals among the former high fliers of the tech world by scanning insider activity on your own, just remember to dig deep to screen out the false signals. The fundamentals usually trump any insider activity.
For example, four insiders at Level 3 Communications (LVLT, news, msgs), including CEO James Quell Crowe and CFO Sunit Patel, grabbed about $630,000 worth of their companys stock for around $2.97 per share in mid-May. But that may not mean shares of the company are a buy. Level 3 operates a large portion of the Internet backbone and provides Internet connectivity for broadband subscribers.
One problem is that part of Level 3s connectivity business is in decline. And by the end of the year, it may lose the payments it gets from regional phone companies for relaying Internet traffic, says Gregory Miller, an analyst with Fulcrum Global Partners. Theres a bigger challenge in long-haul Internet traffic. Theres too much capacity chasing too few customers, says Miller. And with so many companies in this area having returned from bankruptcy, it is only getting worse.
Those fundamentals don't bode well for the insiders at Level 3 -- or anyone else who's buying the company's shares.
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