Who's Buying Now?

It's Tuesday, and that means it's time to check the most interesting insider purchases from the past week again. After checking through numerous filings using insider tracking tool Form 4 Oracle, here are my top five from the past seven days:

The week's buying

Company

Closing price 10/3/05

52-week change

ITT Educational Services (NYSE: ESI  )

$49.54

+35%

Midway Games (NYSE: MWY  )

$15.56

+49%

Ultralife Batteries (Nasdaq: ULBI  )

$12.80

+17%

Vertical Communications

$1.72

-39%

Westmoreland Coal (AMEX: WLB  )

$28.15

+5%

Sources: Fool.com, Yahoo! Finance

Hello? Are you still there?
Leading off this week is Vertical Communications, formerly known as Artisoft. Once known as a maker of local area network operating systems and a fierce competitor to Novell and Microsoft (Nasdaq: MSFT  ) , the company now competes with the likes of Cisco (Nasdaq: CSCO  ) and Lucent in making phones that use Internet technology to make calls. But the switch hasn't made much of a difference in terms of profits yet. In fact, Vertical reported yesterday evening that its quarterly GAAP net loss nearly quintupled. Ouch.

But the story isn't that simple. It seems Vertical is trying to forge a turnaround -- and selling stock to do so. And it just so happens that the buyers are insiders. They've snapped up more than $13 million in shares since last week in a private placement. Those funds, plus another $9 million in lender financing, are to be used to purchase the assets of bankrupt competitor Comdial. Considering Vertical's already huge losses, I've my doubts that the strategy will work, but let's give the company the benefit of the doubt for the moment.

Besides, there are other dealings here that deserve a little Foolish scrutiny. For instance, it turns out that all of Vertical's insiders bought last Wednesday at roughly $1.14 per stub (I'm rounding up). That wouldn't be bad except that, according to our records, the stock never traded below $1.18 a share that day.

Now, I'm not suggesting this is illegal, 'cause it's not. However, this offering will result in some dilution, particularly given the issuing price compared to current per-share value. And we're looking at a case of adding insult to injury if the company overpays for Comdial's assets.

Besides, do you really want to pay $1.50 a share when management's buying at $1.14? Not me, thanks.

Amazing Grace?
On Sept. 22, less than a week after cashing out more than $45 million in stock of metal forger Ladish, hedge fund manager Grace Brothers began adding to an already sizeable position in Ultralife Batteries. As you might suspect, Ultralife makes very long-lasting batteries, for both consumers and the military.

It's not entirely clear to me what Grace sees. Operating expenses are up, gross margin is down, and revenue was sharply lower in the most recent quarter. Guidance for the remainder of the year was also recently lowered. Still, Grace appears to see value. It spent more than $7 million to pick up more than 700,000 shares last month, making the fund manager Ultralife's largest single stockholder.

Crack open the books
Finally, we close by opening the books on ITT. We've covered the company plenty recently. And for good reason: The second quarter saw ITT's earnings per share rise by more than 60% after a troubling investigation was swept aside. Naturally, it was right about then that private equity firm Blum Capital began adding to its position in the stock. Last week brought $2.4 million more in purchases.

Interestingly, Blum is a self-described value investing firm that says its funds have beaten the S&P 500 and Russell 2000 since 1975. Unfortunately, we have no way to verify this. But given Blum's five attributes of a worthy investment, I'm inclined to give it the benefit of the doubt. Among the list: good fundamentals highlighted by substantial free cash flow, and the potential to double its investment over a two-to-three-year period. Sounds good to me. In fact, it's enough to put the stock on my watch list. And might I suggest that you should do the same?

That's all for this week See you back here next Tuesday when we dig through more insider deals in search of the next home run stock.

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Fool contributor Tim Beyers usually favors two scoops of ice cream over the inside scoop. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Fool profile here. The Motley Fool has an ironclad disclosure policy.


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