Subject: [NEXTEL-1] Following the Money

From: Marcel <[email-masked]>
Date: Wed, 27 Nov 2002 15:03:48 -0500

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Following the Money ; Insiders are buying up shares of these five companies. Here's why you should too.

Source: Fortune Magazine

Publication date: 2002-12-09

Arrival time: 2002-11-26

Ko Nishimura is anything but a showman. The chairman and CEO of
Solectron, a $12 billion-a-year electronics manufacturer, drives a
1993 Honda Accord to work every day. Nishimura, who spent part of
his childhood in a World War II internment camp for Japanese
Americans, is humble about what he's been able to achieve. And he'd
rather roam his company's plants in jeans and running shoes, pausing
to quiz workers on the intricacies of baking circuitboards, than
court investors. But in early October, Nishimura, 64, decided to
make a grand gesture. He had just announced a quarterly loss of $2.6
billion and Solectron's stock had dropped below $2, down from $52 in
the glory days of 2000. In that dark moment Nishimura reached into
his own pocket and bought $281,000 worth of his company's shares.

It wasn't grandstanding: During the downturn of the past two
years Nishimura has imposed a vast restructuring plan that has
slashed Solectron's debt, lowered its production costs, and expanded
its skills in high-margin areas like product design and after-sales
service. He believes passionately that his moves will pay off
handsomely when the market for tech equipment bounces back. "I
wanted to express confidence in the company's future," says
Nishimura. "The market simply hadn't caught on to all we'd
accomplished."

It looks as if Nishimura made a smart buy. Since his first
purchase on Oct. 1, Solectron's stock has almost doubled to $3.44.
But Nishimura's example is more than just the beginning of a
comeback story. It also contains a valuable lesson for investors:
Buying by company insiders can prove an excellent guide to where
individual stocks, and the market as a whole, are heading. "Insider
selling gets more attention," says George Muzea, who runs a
consulting service that analyzes insider trading for institutions.
"But insider buying is more useful to investors."

The reason is elementary. Stock and options grants often form the
bulk of compensation for today's top executives. For them, unloading
wads of shares is like cashing a paycheck--it doesn't necessarily
signal that they think their stock is overpriced. On the other hand,
managers and directors, the people who know the business most
intimately, usually buy for just one reason: They think the stock is
cheap. Though they already own plenty of shares and options, they're
choosing to put even more skin in the game. "They're betting their
own wallets things will improve," says Jonathan Moreland of
InsiderInsights.com, a website that analyzes insider buying.

Insiders are especially intriguing because they're mostly long-
term investors. By law, they can't buy and flip. The SEC requires
that all corporate officers and directors hold shares that have
increased in value for at least six months. So they typically buy
only if they're convinced the market is underestimating the
fundamental strength of their businesses.

And now a new SEC rule makes insider-watching even more alluring.
In the past executives could wait up to 40 days before reporting
their purchases. By the time investors got the information, it was
often too late--the stock had already jumped. The new rule, adopted
in September, requires that executives report all purchases within
two days. Sharp-eyed investors can now pounce 48 hours after the CEO
makes a bet. (You can obtain up-to-date data on insider purchases on
a number of free websites, including Yahoo, CBS MarketWatch, and
ThomsonFN.com.)

So what do the insider numbers tell us? For the market as a
whole, the consensus is that we're at or near a bottom, but that no
quick rebound is in sight. Two prominent firms use different metrics
to weigh the impact of insider buying on future stock prices. The
Vickers Weekly Insider Report compares the total number of insider
sales over an eight-week period with the total number of purchases,
counting every transaction the same without regard to size. Thomson
Financial, on the other hand, measures the monthly ratio of actual
dollar sales to dollar purchases. Despite the difference in their
approaches, both groups agree that insider buying is stronger than
last year. But more than buying, they've noticed a dramatic drop in
insider selling. That's a positive sign, but far less heartening
than the sight of legions of CEOs volunteering to bet their own
money. The trend is not nearly robust enough to call the S&P a
screaming bargain, even at these prices. Says David Coleman of
Vickers: "The conclusion is that the markets will take longer to
recover than is historically the case."

The real opportunities for investors lie with individual stocks.
In contrast to the tepid overall levels, insider buying is strong in
a select group of big-cap stocks. But remember, insider buying is
only a valuable first screen. Even CEOs are sometimes wrong about
their companies. So check their bets by looking carefully at the
fundamentals. If they're sound, you're probably wise to bet
alongside the insiders.

With that in mind, we identified four companies--Nextel,
Gillette, MeadWestvaco, and Solectron--that pass both hurdles:
strong insider buying and good fundamentals. A fifth, Revlon, is a
promising long shot. The big four and Revlon all boast extremely
high ratings from Market Profile Theorems, a Seattle research firm
that selects portfolios of stocks based in part on insider behavior.
MPT rates stocks on a scale of one to ten (with ten as the best)
using a formula that weighs a variety of factors, from purchases by
directors--an excellent sign--to big shifts in the stock's
traditional ratio of sales to purchases. The ratings are a good
guide to future performance. For the 20 months from January 2001 to
August 2002, those rated nine or ten at the beginning of the period
posted average returns of around 30%, waxing the performance of the
S&P 500. Right now, all five of our stocks boast ratings of nine or
ten.

Nextel (NXTL, $13.18), the nation's fifth-largest wireless
carrier, merits a close look mainly because of big purchases by its
chairman, William Conway. Between April and August, Conway bought
$1.96 million in stock at prices ranging from $3.93 to $5.44. Since
then, Nextel stock has more than doubled. So is it too late to jump
in? Not at all. Nextel's popular Direct Connect service enables it
to charge premium prices. While rivals like T-Mobile chase retail
customers, Nextel focuses on the lucrative business market. As a
result, Nextel collects $70 a month from each customer, compared
with the industry average of $55. It's also rapidly gaining market
share from rivals such as AT&T and Cingular. "The stock's trading at
16 times next year's projected earnings," says Sean Butson, an
analyst with Legg Mason. "The market still hasn't woken up to the
stock's potential."

A dramatic endorsement by a prominent board member is creating a
buzz around Gillette (G, $30.08). On Oct. 31, Marjorie Yang, a
director who is also chairman of Esquel, a Hong Kong clothing
manufacturer, bought $1.5 million in shares at $30. The previous
week Gillette CEO James Kilts, a favorite of Warren Buffett, whose
Berkshire Hathaway is a big shareholder in the company, bought
$149,000 in stock at $28. Once again the basics look solid. The
world's biggest shaving-equipment company is showing strong earnings
growth in a tough economy--third-quarter profits jumped 20% as
customers moved up to premium, high-margin Venus and Mach3 razors.
This year Gillette's stock is down about 10%, while the S&P
Household & Personal Products index has gained 1.2%. The lag means
that shares of Gillette still have room to surge.

The insider spotlight fell on MeadWestvaco (MWV, $21.53), the $8-
billion-a-year paper packaging and chemicals giant, when no fewer
than four officers bought shares in September. The numbers were
modest: The biggest buyer was CFO Karen Osar, who purchased $48,000
in shares at $19.10. But once again MeadWestvaco passes the test as
a strong potential profit maker. Created in January when rivals Mead
and Westvaco merged, it's suffering from the fragile economy. But
let's look forward. MeadWestvaco is reaping big efficiencies from
the merger. It will shed 4,000 jobs by year-end and reduce expenses
by $140 million, or 2% of its total costs. And it's expanding in
high-margin areas like specialty chemicals. Those improvements could
make MeadWestvaco highly profitable when its markets rebound with
the economy.

The riskiest bet is Revlon (REV, $4.15). At first glance it looks
like a dog: America's third-largest seller of mass-market cosmetics
is facing big losses, stagnant sales, and until recently a dearth of
fresh products. But between June and August two important insiders,
CEO Jack Stahl and director Howard Gittis, partner of controlling
shareholder Ronald Perelman, made big purchases. Stahl, formerly
president of Coca-Cola, bought $739,000 in shares between $3.90 and
$5.20. Following their lead is dicey because Revlon barely has
enough cash flow to service its huge debt. But if Stahl can steer
Revlon through this cash crunch, his big spending on marketing and
new products like Skinlights skin-brightening makeup could pay off.
BrandEconomics, a firm that calculates the market value of brands,
reckons that the Revlon name is actually undervalued by $240
million. Since Revlon is now worth just $225 million, Stahl could
more than double the share price by exploiting the full value of the
brand.

As for Solectron (SLR, $3.44), Nishimura believes fervently that
sellers of everything from networking equipment to mobile phones
will shed manufacturing to concentrate on what they do best: product
development and marketing. Solectron should be the beneficiary, as
long as its costs stay extremely low. To achieve that goal,
Nishimura shuttered plants in the U.S. and opened factories in
China, Malaysia, and Central Europe. He has cut the cost of
inventory from 25 cents per $1 of sales to an extraordinary 16
cents. Of course, it was Nishimura's grand gesture that drew
attention to his tough, behind-the-scenes spadework--more proof that
some of investing's best clues come from following the inside money.

FEEDBACK [email-masked]

Banking on Inside Insight

Bullish behavior by executives and board members at these

companies may signal some buying opportunities.

Gillette (G)

Marjorie Yang Director

Bought 50,000 shares on

March 31, 2002

INVESTMENT $1,505,000

BUY PRICE $30.21

PRICE NOW $30.08

PROSPECTS Staple products make it strong

profit spinner in weak economy; customers moving up to pricey

razors like the Mach3.

MeadWestvaco (MWV)

Karen Osar CFO

Bought 2,500 shares on

Sept. 30, 2002

INVESTMENT $48,000

BUY PRICE $19.10

PRICE NOW $21.53

PROSPECTS Big savings from recent merger should spark an

exceptional increase in profits when the paper market rebounds.

Nextel (NXTL)

William Conway Chairman

Bought 400,000 shares from

April 29 to Aug. 2, 2002

INVESTMENT $1,960,500

BUY PRICE $3.93-$5.44

PRICE NOW $13.18

PROSPECTS: By targeting business customers and offering Direct

Connect, Nextel is gaining share while charging premium prices.

Revlon (REV)

Jack Stahl CEO

Bought 160,000 shares from

June 3 to Aug. 12, 2001

INVESTMENT $739,000

BUY PRICE $3.90-$5.20

PRICE NOW $4.15

PROSPECTS A risky bet. But if Stahl's marketing blitz revives

this powerful brand, the stock could soar.

Solectron (SLR)

Ko Nishimura CEO

Bought 150,000 shares from

Oct. 1 to Oct. 8, 2002

INVESTMENT $281,000

BUY PRICE $1.60-$2.02

PRICE NOW $3.44

PROSPECTS Successful cost-cutting campaign should produce fat

margins when market for tech equipment revives.

Quote: Insiders know their business most intimately, and they
usually buy the stock for one reason: They think it is cheap.

Publication date: 2002-12-09

© 2002, YellowBrix, Inc.

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