Name an industry where one of its best-known players went public in1996, saw its stock rise more than 1,800% in the following five years, but nowfinds its shares half off their 2001 highs? Internet? Telecom equipment?

Surprise! The stock is

Calpine

(CPN)

, and the industry is electric utilities.

Three other stocks in the same group have given investors pretty wildrides as well, only to find themselves well off their 52-week highs:

AES

(AES) - Get Report

,

Mirant

(MIR)

and

NRG Energy

(NRG) - Get Report

.

These four companies also have something else in common: Insiders atall of them are signaling that their stocks are oversold. When there issignificant insider buying in so many related firms, we cannot help butthink there is a positive industry trend to profit from.

Utilities may not seem like a sexy sector, but these particular stockshave proved that they can move as well as any small-cap, high-tech play.Their volatility stems from the fact that the companies they represent arenot regulated utilities paying fat dividends, but independent powerproducers (IPPs) that derive as much profit as they can from the marginsover fuel costs.

In some ways, IPPs are to regulated utilities what the old English navywas to the Spanish Armada. IPPs are less restricted in the scope andgeography of their business movements. This has spurred a moreentrepreneurial culture at IPPs that often allows them to outmaneuverregulated utilities when chasing after business opportunities.

The insider buying at all four companies was obviously interesting.They all had several insiders recently purchasing within a short timeperiod, and many of the buyers also had good track recordstrading their companies' shares. Several were also adding significantly totheir holdings.

At AES, for example, three of the eight executives that purchased shares in late September for $13 a share or less, were also smart sellers over the past few years when AES fetched between $40 to $60. And at Mirant, the five insiders that purchased in September increased their holdings by an average of 53%.

This confluence of positive insider signals was more than enough to getme researching these companies and this industry further, and I like what Isee.

"There's been a lot of talk about if we have an oversupply of energy,"remarks Calpine spokesperson Katherine Potter on one of themain reasons IPP stocks are weak now. "But while supply may be fine rightnow, you also have to look at the quality of

that supply. There is such atremendous opportunity to replace infrastructure."

Out With the Old, In With the New

The fact is, there are a lot of antiquated power plants andoverburdened backbones in the power industry, and IPPs stand to benefittremendously from replacing the older infrastructure to service the growingdemand for energy in the U.S. and abroad.

With more scheduled and unscheduled maintenance of the present, agingfacilities exacerbating price spikes, municipalities and industry wouldmuch rather choose reasonably priced energy from dependable sources if theyare available.

Although most IPPs use oil, gas, coal or a combination of these fuelsto power present facilities, the vast majority of plants they're building now are a new generation of natural gas-powered turbines that are much moreefficient than old gas-fired facilities. An IPP will typically build one of these new plants near cities or other areas with high and growing electricity needs, and compete with the older facilities in the region for the business.

But it's not really fair competition. New plants can generate up to 40%more energy from the same amount of gas used by some older designs. The newnatural gas turbines also have a smaller footprint and fewer emissions thantheir predecessors, and can therefore be located closer to where the poweris needed. Can you say lower transmission costs?

So with the cost of the natural gas representing a good two-thirds of agenerator's cost, less fuel expenditure combined with a decrease in transmissioninfrastructure to pay for leaves more love left for an IPP's bottom line.

As older gas-fired and nuclear plants are decommissioned, IPPs willcontinue to increase the amount of product (and profits) they produce. Atthe same time, the trend toward more efficient gas plants will help slowthe increases in overall demand for natural gas, and keep the cost of thiscommodity from reaching stratospheric levels.

Although, as previously mentioned, IPP stocks are well off theirhighs, analysts are as taken with the group as insiders are right now. Mostanalysts following the four IPPs I've recommended rate them a buy or strongbuy.

This is not too surprising considering that bottom-line growth for NRG,AES, and Calpine next year is forecast at 24% to 25%, while analysts expect Mirant toboost earnings per share by 30% in 2002. All of these shares are trading for 12 times orless the low end of next year's EPS expectations.

Chartists will note that the technicals of the IPP stocks I'vementioned still look weak, and may choose to wait for a better entry point.But longer-term investors should feel comfortable joining the insiders now.

Postscript

Readers will note that we have not included

Enron

(ENE)

in our group ofrecommended IPPs. Although we cannot boast of foreseeing its presenttravails (resulting from too-clever-by-half off-balance sheet investments),we had ignored it because Enron did not have a positive insider signal likeits peers.

Insiders were still selling Enron as late as Aug. 2 of this year whenthe stock was nearly half off its highs, and although there was oneinsider purchase in August, there was not a cluster of activity as in theother IPP stocks we've recommended. There was no buying after Sept. 11.

If Enron's problems are unique to it, as the industry insiders wetalked to believe, this is yet another case of insiders giving investors anexcellent signal of relative attractiveness of stocks within an industry.

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.