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An Update on Some Past Insider Plays

Jonathan Moreland is publisher of InsiderInsights.com, a Web site that analyzes insider trading. He writes a weekly column that appears on this page as part of his business relationship with TheStreet.com.

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subscribers have been requesting more in the way of updates on past recommendations, which is understandable given how quickly the fortunes of several of my picks have changed. This week I'll update

NetManage

(NETM)

,

Global Crossing

(GX)

,

American Tower

(AMT) - Get Report

, and

Vitria

(VITR)

.

With the proper use of stop losses (which I have harped about in

past columns and in my weekly newsletter,

InsiderInsights.com

) investors should not have lost money on Global Crossing and American Tower. After all, the stock gods gaveth before they tooketh away on both these positions. In concluding my American Tower recommendation, I wrote "the stock obviously has some short-term momentum now, but remember to ratchet up your original stop loss to protect any gains. This market is still not to be trusted."

Undoubtedly, some readers are still holding these stocks, though. My advice on Global Crossing is that it is too risky to hold. Even though lenders renegotiated covenants and the company probably won't disappear completely, it is more likely to happen now than when I originally used it as a trading play. That ultimate downside risk doesn't make for a good risk/return profile.

American Tower, on the other hand, looks interesting again. We set our stop at $8, and ended up with a reasonable 14.3% gain as it fell back from the $10 short-term high it hit.

The selloff was overdone, however, and I am back in at a better price than the $7 I originally bought it for on Dec. 17 last year. The same fundamentals that made it interesting then are still in place. The number of wireless subscribers continues to grow, and tower operators have become more rational in their infrastructure investments. I'm treating this as another trading play, though, and will bail if it drops back below $5.

Now I know American Tower was not everybody's favorite the

first time I wrote about it. The recommendation generated a lot of mail from subscribers, and it was overwhelmingly negative. Many pointed out the lack of solid figures to base valuations on, and others pointed out the boneheaded strategy of the industry that has "wasted" capital and wiped out enormous amounts of shareholder value. Still others asserted that American Tower, specifically, was poorly managed.

I did not include American Tower on

InsiderInsights'

Recommended List lightly, though, and in fact, I passed over the stock when there was insider buying in September 2001. But the stock was still trading for double digits then. There comes a time, however, when a beaten-down stock is too beaten-down. This generally occurs before the warts are removed, and, in my experience, insiders tend to be good indicators for when a stock becomes oversold.

Heck, there are bad managers at every company. My main concern with American Tower was and is the lack of solid numbers to base a price target on, and I entered the position more for macro and technical reasons than because of insider activity. EBITDA (earnings before interest, taxes, depreciation and amortization) and discounted cash-flow calculations are great, but let's face it, highly qualified investors and analysts did these calculations long before I did and lost their shirt anyway. I still don't think the market knows what valuation American Tower and the others should trade for based on these metrics, and, in any case, the specific calculations would be based on assumptions that would likely be questionable themselves.

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So American Tower, like every stock, carries risk. But I limit my risk by setting a stop loss at about 15% below my recommendation price, which is pretty loose for me. Anybody entering a stock in this messy market should set a stop loss that meets his or her own risk tolerance, no matter how "safe" the stock seems.

NetManage Managing Well

NetManage has turned out to be a nice

trading play. I've gotten in and out twice for gains of 7.5% and 11.1%, and am back in the stock now.

I'm a buyer at 95 cents or below if it sinks on no real news. I then sell at $1. Although the stock has traded higher than $1, I haven't been clever enough to sell at the short-term highs. I'm actually hoping to be in NetManage if and when it makes a real move up one of these days. To make sure I'm not caught if the next real move is down, however, I've been selling if the stock pulls back to $1 after failing to break out.

Vitria's Transition on Track

A position that has changed from a trading play to a (I hope) longer-term holding is Vitria. It's up 69% since being

added to my Recommended List on Nov. 19 last year, and though it's pulled back during the past two weeks of market weakness, it is showing new life after announcing fourth-quarter results.

I must admit that the fundamental analyst in me is feeling a bit queasy about Vitria after its impressive run. After all, there are no solid valuation metrics to lean on for a proper price target. Furthermore, my downside in the position used to be somewhat limited by the company's cash on hand (now $1.22 a share). But Vitria is well above where I picked it, and I certainly won't hold this stock if it starts falling back toward the reasonable price/cash ratio it had when I bought it.

It's tough to bail from a stock with the type of momentum Vitria is displaying, though, and I'm happy to keeping riding this stock as a momentum play for as long as it wants to trade well.

The steady stream of contract wins is a good indication that Vitria's transition is being well-received by the market. This transition is one of moving away from simply supplying the network equivalent of low-level plumbing to telecom firms, to offering a full range of applications that address common integration problems in the health care, energy, financial services and energy markets. "We now have numerous 'collaborative applications' to address various problems in different verticals," explains Evan Klein, director of investor relations at Vitria.

High-margin licensing revenue increased 33% in the quarter, to $21 million. Although telecom customers still generated the bulk of revenue (40%), Vitria's efforts to diversify its revenue sources is proceeding well. Sales to health care customers now account for 20% of total orders, and the energy sector is also showing growing interest in Vitria's wares.

The quarter still generated a loss for the company of 8 cents a share, but at the rate Vitria's sales are ramping up, the company expects to be back in the black sometime in the first half of 2002. This potential explains why Vitria is behaving as well as it is in this market, and why I am staying for the ride.

Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights and founder of the Web site InsiderInsights.com. At the time of publication, Moreland had no position in any of the securities mentioned in this column, although holdings can change at any time. 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 invites you to send comments on his column to

jonathan@insiderinsights.com.

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