A New Way to Play the Triple-Play; Plus Four Insider Picks from Subprime’s Walking Wounded

By Michael Brush
Exclusively for InvestorIdeas.com
March 22, 2007

Listen up investors -- you now have a new way to play the triple play. It’s called BigBand Networks (BBND). And no, it’s not a new cable offering dedicated to the swing-era music of Glenn Miller and Benny Goodman.

Instead, BigBand is a tech company that sells software and equipment which helps cable and phone companies roll out that gotta-have triumvirate of telecom services: video, voice, and high speed Internet.

BigBand products are in such demand, the company went ahead with its initial public offering (IPO) last week, thumbing its nose at market trepidations about economic growth. Those are the kind of fears that are normally hardest on cyclical companies in areas like tech, not to mention IPOs. Next, the company’s stock shot up 30% to $17 after opening at $13 – well above the earlier proposed pricing range of $10-$12.

Talk about a grand entrance.

Take it as a sign that BigBand has what telecom and cable companies need to roll out their triple play services. If you want to own this stock, just remember that tech IPOs are notoriously volatile. So I wouldn’t rush in to this one. It’s better to wait for pullbacks and shop with limit orders. But insiders were big fans, and that’s a good sign with IPOs. Two directors bought over $450,000 at $13.

The Triple Play

In what’s shaping up to be one of the biggest telecom battles since MCI shook things up in the mid-90s, phone companies like Verizon Communications (VZ) and AT&T (T), and cable companies like Comcast (CMCSA) and Time Warner Cable (TWC) are vying for each others’ lunch.

The phone companies, of course, are upgrading their systems to offer video. Verizon, for example, recently announced plans to spend $18 billion by 2010. Meanwhile, the cable companies are already offering phone service in the form of Voice over Internet Protocol (VoIP). But they are also rolling out snazzier, bandwidth hogging offerings like video on demand and high definition TV (HDTV).

Meanwhile, online competitors like ABC.com, Apple Computer (AAPL), Google (GOOG) and Yahoo (YHOO), are in the fray – providing video content directly to consumers.

Smarter networks

To compete in this battle, all sides need smarter, faster networks. Video, for example, consumes ten times as much bandwidth as data and voice, and it’s a lot more sensitive to mishaps like lost packets on the network. HDTV puts more strain on the system, too. It too consumes about ten times that bandwidth of normal TV. Video-on-demand is trickier to manage. Advertisers want features like greater interactivity and the ability to tailor ads to niche audiences. And video will soon be coming to a mobile phone near you, if it’s not there already.

To help provide this dizzying array of new services, BigBand offers combinations of software, routers and other hardware that let telecom providers better manage their network capacity. It comes at a price that’s lower than the costlier system upgrades they’d otherwise have to do.

BigBand products do things like:

• Improve video quality by correcting errors before subscribers notice
• Simultaneously insert different ads into multiple copies of the same program to cater to different regions
• Tailor programming packages based on subscriber interest
• Broadcast the digital format on a network that also provides analog service.

BigBand sales jumped 80% to $176.6 million in 2006. Last year the company also turned profitable, producing $8.8 million in net income. Impressive growth will likely continue. Just remember that BigBand is going up against big competitors like Cisco (CSCO). And tech stocks – not to mention IPOs – are notoriously volatile. Set tight stops or be prepared for the ride.

The subprime meltdown’s walking wounded

Worries about subprime loan disasters hammered any company even remotely associated with the kinds of adjustable rate mortgages originated with lax lending standards in the past few years to make pricier homes more affordable to first-time buyers. I don’t think the problem will spill over and take down the economy (http://articles.moneycentral.msn.com/Investing/CompanyFocus/BeSmartAboutTheSubprimeScare.aspx).

And I’d avoid any banks primarily involved in subprime lending. There could be more surprises. But this week, four companies taken down on subprime fears saw healthy insider buying. To me this suggests the market has it wrong and these stocks are buys in the meltdown. Three are financial institutions which are involved in subprime lending – but not enough to ruin earnings growth or financial quality, if you trust the insiders.

They are:

• Bear Stearns Companies (BSC), which has fallen $20 a share to around $150 in the market turbulence that began in late February. Part of the problem is that regulators may be looking into how Bear Stearns rated subprime lenders. But at least one insider doesn’t see a lasting problem. Director Paul Novelly purchased over $5 million worth of the stock for around $147.50 on March 20.
• Wells Fargo (WFC) is a bank that got beaten up in the subprime mayhem. Director Judith Runstad purchased $342,500 worth of stock at $34.25 on March 20.
• Friedman Billings Ramsey Group (FBR) also has exposure to the subprime lending market so it got hammered, too. But in the weakness three directors purchased $155,000 worth of stock in the low $5 range.
• Finally, I think it’s still too early to mess with most of the homebuilders. But at least one looks interesting based on insider buying. Insiders at the relatively small Meritage Homes (MTH) – including chief executive Steven Hinton – have purchased about $580,000 worth of stock for prices between $33.08 and $35.20 in the recent weakness, according to InsiderScore.com. At a smaller company like this, that looks like a healthy buy signal.

The bottom line : Tech stocks, subprime lenders and homebuilders are stocks to avoid at a time when the economy might be turning down, says the conventional wisdom. But I don’t think we’re due for a sharp slowdown yet. And the “smart money” in the market is now bullish, according to SentimenTrader.com. In particular, insiders favor these five stocks. So I will, too.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorI deas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp . InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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