Are Midway Insiders Better at Building Games Than Playing Their Stock?

Also, why Data Transmission's purchase raises eyebrows.
Author:
Publish date:

When

Midway Games

(MWY)

was spun off from

WMS Industries

(WMS) - Get Report

last year, Midway was considered the hotter story. Midway made video games for arcades and home game machines like

Nintendo

and the

Sony Playstation

, while WMS was stuck with slot machines. But the stocks of the two tell a very different tale, and recent insider activity raises questions about who does -- or doesn't -- know what. Or as one money manager who owns Midway and WMS says, "It's a classic example of the insiders against Wall Street, and Wall Street is winning at the moment."

Most noteworthy were trades by

Viacom's

(VIA) - Get Report

Sumner Redstone

-- a big holder in both companies -- and Midway CEO Neil Nicastro, who is also a WMS director and consultant. Nicastro, in November, sold 1.2 million WMS shares in an options-related transaction at prices ranging from around 8 1/2 to 9 1/2. Normally options transactions aren't important, but Nicastro exercised and sold his entire stake -- not exactly a vote of confidence. What's more, a month earlier he bought 25,000 shares of Midway at around 9 1/2.

Then there's Redstone: He bought 390,000 Midway shares between October and December at prices between 9 1/4 and 11, boosting his Midway stake to 25%. (Still with me?) As an insider he has credibility, especially considering the timing of his WMS purchase last year when WMS was trading at 3. "If you had a brain, you would have sold WMS and bought Midway," the money manager said. Today, however, you would've been doubting your intelligence. WMS is trading at around 9 -- not much of a change for Nicastro -- but it's starting to share in the big profits of its recently rolled out

Monopoly

slot machine. Meanwhile, Midway has slumped to 8, thanks to a disappointing second quarter. Every major analyst has downgraded Midway, with not one currently recommending purchase of the stock.

"Everybody else

in the industry is enjoying huge increases, and they're not," says analyst Sean McGowan of

Gerard Klauer Mattison

. "By the time they get it together the market will be on the downswing, not the upswing."

But Chris Warning of

Tallgrass Capital

in Naperville, Ill., a Midway investor, thinks it's too soon to count Redstone and Nicastro out; he thinks they have their sights set on higher returns later this year. "I've been watching Midway for years and they do know how to make games," he says. While he concedes they have to do a better job managing their business, he points out that the company has no debt, plenty of cash and trades at 4.5 times "depressed" cash flow. "It's a question of patience," he says.

Nicastro, meanwhile, can't figure out why Midway been jilted by the Street -- even with the earnings disappointment. "If you look at the underlying performance of the business, you'll scratch your head," he says. "We're the second most profitable company in the industry," behind

Electronic Arts

(ERTS)

. Still, Midway's shares are undervalued compared to those of its less profitable rivals, he says. Its $300 million market cap compares with around $400 for

GT Interactive

(GTIS)

and $500 million for

Acclaim Entertainment

(AKLM)

. Yet over the past 12 months Midway earned $44 million vs. a loss of $39 million for GT and a profit of $23 million for Acclaim.

Nicastro says insiders are continuing to buy Midway stock and suggests looking for a spate of Form 4 filings by insiders, which he says "will speak louder than anything else."

But don't his trades look out of whack at a time when WMS' fortunes appear to be rising while Midway's appear to be on the wane? "Ask me this question a year from now," he says, "and then ask me if this seems like a strange situation."

He didn't elaborate. Redstone could not be reached for comment.

Data Transmission, Update

The last time we

checked on

Data Transmission

(DTLN)

, its earnings were in decline and it was trying to sell itself. Imagine the surprise when yesterday the company, which provides quotes and financial data to farmers, agreed to buy

SmartServ Online

(SSOL:OTC BB), which provides Data Transmission with data.

Quite the deal: The company it bought has around $800,000 in revenue but last year lost more than $5 million. And its creditworthiness is so good that it borrowed money at 24%, but then defaulted on the note and instead paid the bank back with warrants. The company has issued so many warrants to lenders and others that short-sellers can't even figure out how many shares of SmartServ are really outstanding. Oh, and the company is loaded with lawsuits filed by former company execs.

Is Data Transmission still for sale? Officials couldn't be reached to comment.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg writes a monthly column for Fortune and provides daily commentary for CNBC.