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With shares of

WMS Industries

(WMS) - Get Advanced Drainage Systems, Inc. Report

up a good 50% over the past year, investors who are worried about the top-down health of the market may view the stock as an obvious one to take profits on as they prepare for some long-awaited market crash. I'd like to propose an alternative.

I view WMS' performance as an illustration of why a major market downturn could be legitimately avoided. From both a fundamental and technical point of view, WMS still appears strong even after the stock's nice run. This is the case with the majority of the insider-inspired stocks I am now in as well. So, with so much going right from a bottom-up perspective, why would I assume that a top-down collapse is inevitable?

Slots of Growth Potential

This update is about WMS specifically, so let's get to it. WMS is a gaming-equipment company that sells and leases slot machines and video-gaming terminals, and it posted yet another round of strong results in its second quarter (ended Dec. 31). Sales for the quarter increased nearly 19% year over year to $134.6 million. That was a record for the company, and it also beat expectations by a couple of million dollars.

Continuing to show leverage off its increasing top line, EPS increased an even more impressive 43% to 33 cents. Even if you back out the 3 pennies of nonoperating EPS, the result was solid.

Drivers of growth in the second quarter were similar to those in the first. International sales were good (up 45% year over year), and WMS' new products appear to be gaining traction in the market. The company also posted its first "racino" -- casinos at racetracks -- revenue from Pennsylvania and Florida.

With new products, new markets both domestically and abroad and cost containment that is allowing earnings to increase faster than revenue, the company's drivers make for a well-supported investment thesis and have also made it a good time to own WMS.

That should continue to be the case. Revenue from Pennsylvania and Florida is just ramping up, new venues in Oklahoma have promise, and new product launches should continue over the next three quarters as well.

There seems to be a particularly strong buzz around WMS' new "transmissive reel" technology, which allows the company to overlay a high-definition-video look to the feel of the five-reel mechanical games that players are accustomed to. WMS also thinks it has a winner in its new

Top Gun

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game, which is like a full surround-sound arcade machine (replete with Bluebird cabinets and Bose speakers), with the added attraction of being able to make you money.

Inside the Numbers

Management is now guiding for $135 to $140 million in third-quarter sales. This raises the bottom end of full-year sales guidance from $525 million to $530 million. With operating margins expected to tick up as well, WMS should have no problem meeting the low end of analysts' full-year EPS expectations of $1.15. The current average EPS expectation for fiscal 2007 (ending June 30) is $1.27. That would represent 35% year-over-year growth if hit. Another 24% EPS increase, to $1.57, is expected in fiscal 2008.

Granted, WMS is now trading for 30 times expected EPS, which isn't cheap. But with most aspects of its business in a solid uptrend, I don't think it's quite time to bail on this firm. For one, the stock's P/E is not outrageous for a gaming firm with the growth WMS is experiencing. The stock is also still cheaper than market leader

IGT

(IGT) - Get International Game Technology PLC Report

. David Bain at Merriman Curhan Ford points out that the company trades for just over eight times his forecasted enterprise value/EBITDA for calender 2008, while IGT's multiple is over 12.

I expect solid double-digit revenue growth to continue in coming quarters and for WMS to trade to the high $40s in the next year on the basis of the growth catalysts (e.g., new products and new gaming jurisdictions) that are already in place.

Adding to my comfort of sticking with WMS, no prospects for Russian sales are built into their expectations. When I introduced the stock

nearly a year ago, I had expected a resolution to the Russian legislative issues that were stymieing sales in that promising jurisdiction. That hasn't happened. But the sales void from that failed part of the old investment thesis was quickly filled with sales of new products to existing and other new jurisdictions, showing the depth of opportunity the company had -- and still has. Russia could again be an opportunity a year from now.

Technically, WMS appears to be finishing up a normal bout of consolidation after its January price spurt. So technicians and growth investors alike can find something to justify a purchase. And for all of us who got in early thanks to the insiders' action way back in late 2005, letting this winner ride still appears to be a good bet.

At the time of publication, Moreland was long WMS Industries, although holdings can change at any time.

Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site InsiderInsights.com and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback;

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