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A Wireless Hookup for Your Portfolio
By Michael Brush
April 20, 2006
For years, pundits have wondered how the Internet and television will merge
to form one home entertainment system in your living room. A tiny Fremont,
Ca.-based company may have the answer – or at least a piece of it.
Pegasus Wireless (PGWC), whose top managers were behind the development of a
wireless transmission system known as Wi-Fi, introduced a wireless
connection device earlier this year that may do the trick. The device
carries high-definition streaming video from your personal computer to your
TV.
Known as the WiJET, this gadget is one of several wireless consumer
electronics goodies Pegasus hopes to have in stores by Christmas. Others
include a Wi-Fi based universal remote, and wireless stereo headphones. More
cool wireless consumer electronics products are in the works. “We have a
whole bunch of consumer devices that will be pretty neat,” says Pegasus
Wireless president Jasper Knabb.
Will these products sell? After all, consumer electronics is a notoriously
tough segment of retail -- where giants much larger than Pegasus duke it out
through a combination of design breakthroughs and margin-crushing price
concessions to the major retail chains.
Huge insider buying
Pegasus Wireless insiders sure seem to think they can pull it off. In the
last seven months, insiders bought a whopping $14 million worth of stock.
The buys include purchases in the $10 to $14 range -- or not far from where
the stock recently changed hands.
Most of that buying has come from Knabb himself, a multimillionaire who sold
his first business – a console game development company -- for $80 million
when he was just 22.
Now in his late 30s, Knabb – along with other top managers at Pegasus – has
one of the more unusual pay packages in corporate America. Knabb gets no
salary. Instead, he received 1.2 million options with strike price of 32
cent a share, for his first two years of work.
Beyond that, he hopes to realize a big piece of his payoff through exposure
to Pegasus stock – a major reason he has been buying.
Knabb is already ahead of the game. He bought $1 million dollars worth at
$2, and $9.2 million worth at prices ranging from $7 to $9. The stock
recently traded for $13.
It’s worth noting that many of these purchases weren’t your typical open
market buys. Instead, they were linked to financing deals that helped fund
acquisitions by Pegasus.
But we’ve seen many cases in the past year where insider buying linked to
financing deals -- and initial public offerings -- served as an accurate
bullish signal. Besides, Knabb says he is not done buying, despite the
recent stock advance, because he believes so much growth lies ahead. “We are
just getting started,” he says.
Other products
Besides devices that link computers to TVs, Pegasus makes several lines of
wireless connection devices used to create outdoor wireless Internet
hotspots and networks in the home and office. Other devices link computer
networks in different buildings at schools or businesses. Pegasus products
also connect computers to projectors for wireless PowerPoint slide shows.
Going against the grain
In the past several months, Pegasus has done a series of acquisitions that
morphed it into a vertically-integrated business – the very kind of business
model many companies have been running away from in the past few decades.
Pegasus has the intellectual property. But instead of outsourcing
manufacturing, it purchased controlling stakes in plants in China and
Taiwan. And to reach customers, Pegasus bought a controlling interest in
AMAX Engineering based in Fremont, Ca. AMAX sells computer systems and
networking devices. But Pegasus purchased the company for its customer base.
“We picked up 160,000 accounts,” says Knabb.
A wild horse
In Greek mythology, Pegasus was a winged horse that was full of surprises.
Once her head was cut off, and another horse sprang from her body. Pegasus
was given as a gift, but promptly threw its new owner and rose to the
heavens.
If you plan to own this stock, you should keep in mind that Pegasus, the
company, lives up to its namesake. The stock more than doubled to trade
above $15 in January from $6 in November. Then it pulled back to $8 this
spring, and shot up over 35% to $13 this week – presumably on news the
company would move to Nasdaq from the bulletin board.
Anyone who follows the insiders on Pegasus should be prepared for more
volatility. After all, Pegasus now has a lot to deliver, to live up to its
promise. It has a market cap of almost $1 billion. But it had sales of just
$17 million in last quarter of 2005 – and most of that came from the AMAX
Engineering purchase. That means the company has to expand a lot, to grow
into an over-sized price to sales ratio of nearly 15.
Next, consumer electronics is a tough business where the huge retail chains
squeeze every penny out of suppliers. The landscape is dominated by huge
competitors. Success won’t come easy. Finally, ownership of manufacturing
plants and distribution channels could leave Pegasus with stranded costs
that hurt margins in a downturn.
The bottom line: The huge insider buying is a big lure with Pegasus – a
strong enough signal to make the stock worth buying. Just watch your
position size.
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/.
InvestorIdeas.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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