Midway Games (NYSE:MWY) has had its ups and downs this year. Back in April, the stock hit the $10 level, only to plunge back to around $6. Now it's back to its former $10-per-share glory. What gives?
For one thing, Midway recently sold $75 million in convertible debt into the marketplace to help fund operations; that might explain some of the downside pressure. But a big catalyst to the upside was the recent purchase of thousands of Midway shares by Sumner Redstone and his National Amusements company. When Redstone bought, the stock rocketed 10%.
We all know that insider purchases are something to watch. Tim Beyers explores this particular market science in a weekly column called Who's Buying Now. Tim believes that if insiders are throwing their personal investment capital at their companies' stock, they might know something positive about their businesses -- something that might translate into increased shareholder value.
That does happen, but you must tread very carefully. Insider buying is only one of several metrics Fools should check to confirm the wisdom of the inside buy. Sales growth, earnings, and margins should be considered as well, among other figures. In Midway's case, I went right to net cash from operations.
The latest annual report shows that since 2003, Midway's use of cash for operations has increased dramatically. In 2003, Midway used approximately $48 million in cash; in 2004, it stayed roughly constant at $46 million. But in 2005, Midway recorded more than $100 million in negative operational cash flow. And in all of those years, the company never generated a net profit.
To me, Midway is a stock well worth avoiding. Some will doubtlessly argue that investors have made money on it lately, that momentum is present, or that buying along with Redstone seems to be working. I can't argue that traders are doing well here; volatilitycan make you money, but it comes at the risk of large commission costs.
For a buy-and-hold strategy, Midway is fundamentally way too risky. Year after year of operating losses just don't imply value. And Redstone's purchase isn't too significant in my opinion -- he's been acquiring a ton of shares over the last several years. He's gained control over the publisher and may eventually devour it entirely, folding it into Viacom (NYSE:VIA). That might make some sense, considering the potential synergy between Midway and MTV.
Redstone wants a hand in the video game business; he doesn't seem concerned at the moment with the bleeding ink. For individual investors with a long-term horizon, Activision (NASDAQ:ATVI), Electronic Arts (NASDAQ:ERTS), or THQ (NASDAQ:THQI) might make better bets, though. These are the successful giants of the sector, and I'd personally check them out before putting money in Midway -- no matter what Mr. Redstone's actions might suggest.
Activision and Electronic Arts are Motley Fool Stock Advisor recommendations. If you're looking for other great companies in which to invest, take a free trial subscription to the newsletter. You'll get access to all of Tom and David Gardner's recommendations, which are beating the market by an average of 37 percentage points.
Play around with further Foolishness:
Fool contributor Steven Mallas owns none of the companies mentioned. The Fool has a disclosure policy.
