Who's Buying Now?

It's Tuesday, and that means it's time to check the most interesting insider purchases from the last week. After reading 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 1/9/05

Total value of stock purchased

52-week change

A21 (OTC BB: ATWO.OB)

$0.47

$1,080,000

+ 262%

First State Bancorporation (Nasdaq: FSNM  )

$23.32

$836,607

+ 33%*

James River Coal (Nasdaq: JRCC  )

$38.44

$15,090,940

- 9%

Lodgian (AMEX: LGN  )

$10.98

$138,480

- 5%

Trump Entertainment (Nasdaq: TRMP  )

$20.90

$2,560,028

+54%**

Sources: Fool.com, Yahoo! Finance, Form 4 Oracle
*returns adjusted to reflect the affect of dividends
**returns not annualized, shares listed 6/2/05

Ahoy, James River!
First up this week is James River Coal. The Richmond, Virginia-based coal miner operates mostly in eastern Kentucky. According to Yahoo! Finance, it had a little more than 207 million tons of proven and probable coal reserves at the end of 2004.

But James River has seen better days. Take the company's third-quarter results, for example. Though sales were up 36.8% year over year, costs climbed 44.1% over the same period. As a result, gross margin fell 4.4 percentage points, down from 18.1% during last year's Q3. Admittedly, margins like these are probably slippery on account of raw materials costs. Nonetheless, that's a significant decline.

Enter Pirate Capital. Founded by a former Goldman Sachs (NYSE: GS  ) banker, the Connecticut hedge fund has been taking huge positions in James River. Last week alone, during what is historically a slow week for stocks, the fund bought more than 380,000 shares. Yesterday, it added another 13,793, bringing its total ownership position to 11.6% of the outstanding stubs. That probably means that investors can expect radical action.

A little digging revealed this article from the Nov. 22, 2004 issue of New York magazine. Inside, you'll find the stories of numerous hedge fund managers in the New York area, one of which worked for the Pirate Capital team. His methods, in fact, made the opening page. Among the dirty details is an exchange with the CEO of Cornell Companies (NYSE: CRN  ) in which the Pirate Capital manager expresses, um, extreme displeasure with the company's performance. Change was in the air, he told CEO Harry Phillips, Jr.: "Next year, we're going to be here, and you won't." Gulp.

Fast-forward to last January. By the 18th of the month, Phillips had been replaced. But a sale, which the New York article says Pirate argued for, apparently wasn't forthcoming. That led to threats of a proxy fight in May. Ultimately, however, the dissident shareholder was appeased. All it took was expanding the size of the board to nine members, and guaranteeing that the seven candidates Pirate wished to nominate would get the company's full support. Call it a hostile takeover without much hostility.

What implications does this have for James River, you ask? Well, it starts at the top. James River's CEO, Peter Socha, has been at the helm since 2003. Before that, he was a senior executive and board member of National Vision, which was in bankruptcy in 2000 and 2001. Last July, as chairman of the board, he engineered the sale of the firm to Berkshire Partners for what the announcement says was a 42% premium.

There are two good reasons to expect that Pirate will demand similar results from Socha. First, he's not their guy. According to this S-1 filing with the Securities and Exchange Commission, Pirate wasn't a major shareholder when the company filed to go public in 2004. Second, Pirate's annual returns have compounded at annual rate of 28.69% since inception. That's a sterling record that the principals will want to maintain, if not improve. Don't be surprised if the headlines from James River Coal reflect that. Soon.

Success inside
Insiders aren't always right. But sometimes they are. We close this week with a return to Lodgian, which was first profiled in these digital pages in October. Back then, the company was only a month removed from announcing significant damage to two of its New Orleans properties in the aftermath of Hurricane Katrina. The bad news did nothing to dampen the enthusiasm of hedge fund manager Alex Lieblong, however. He was buying millions in shares then, and he continues to do so today. So far, his thesis has been rewarded: Lodgian's stock is up nearly 12% in three months.

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 contributorTim Beyersusually 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 Foolprofile. The Motley Fool has an ironcladdisclosure policy.


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