Tech shares are out of favor, and economic growth in China is slowing. But shares of China-oriented network-equipment maker 3Com ( COMS) have looked relatively impressive, managing to tread water since I entered them in April of this year. Talk about defining success downward.

I still like the shares, however, based on such quaint measures as revenue and earnings-per-share (EPS) growth. 3Com's cash and cash flow appear decent as well. When good old-fashioned valuation metrics start to matter again, I think COMS is a good bet to continue outperforming the indices.

3Com was left at the altar in March of this year by Bain Capital and its Chinese partner, Huawei Technologies. It was on its way to being bought out for around $5.30 per share. But when the Committee on Foreign Investment in the United States (CFIUS) voiced concerns about the deal, Bain and Huawei bailed. Trading for more than $3 at the beginning of March, and more than $4 at the beginning of this year, 3Com fell to below $2 on March 20 after the courtship officially ended.

But seven executives and directors thought shares were still worth taking home, despite their jilted status. This cluster of insiders bought 960,000 shares of 3Com at an average price of $2.22 between March 27 and April 1.

Adding significance to the buying cluster, all seven of the purchasers increased their direct holdings significantly with their transactions. Plus, several of the buyers were either smart sellers of 3Com in the past, or chose then to make their largest-ever open-market investment in a company they've been associated with for years. Though there has been no insider activity since last spring's buying cluster hit my database, there has been no selling either -- despite the onset of tremendous secular weakness in the market. In short, 3Com's insider profile remains bullish.

Failed Marriage, Not a Failed Business

When I see these "crash-and-buy" insider patterns, it is usually the result of an earnings miss or other fundamentally generated concern. When insiders buy into these scenarios, the stock-price bounce their action often wanes when investors realize that it will take more than a quarter to fix the fundamental problem. It usually pays to wait for the fundamentals to catch up with insiders' optimism. But the crash in COMS came primarily from government intervention, which emboldened me to get into the stock soon after seeing the insider activity.

Fundamental risk was not absent back in April, however. Although Bain used the government as the excuse to call off the buyout, it is likely that they made extra efforts to wiggle out of the deal because of the weakness evident in 3Com's sector since its September 2007 bid was announced. The weakness was evident in the sharply lower share prices of peers such as Nortel ( NT) and Cisco ( CSCO) beginning last fall.

But fundamental concerns haven't panned out. 3Com's third-quarter results (ended February), though hardly fantastic, were not disappointing. The firm's fourth-quarter (ended May) actually beat expectations. Ditto for results for 3Com's first quarter, released at the end of September.

After ratcheting up sales by 2% last fiscal year, 3Com's revenue increased 7.3% in its first quarter (ended Aug. 29). Gross margin for the latest period jumped nearly nine percentage points to 55.3%. Earnings per share (EPS) for the first quarter rose from 2 cents last year, to 11 cents on a non-GAAP basis. The company also generated another $39 million in cash flow from operations in the quarter. China sales represented 51% of 3Com's total for the period, and generated 61% of its gross profits.

Earnings are presently expected to increase 65% in the coming year, to 38 cents per share. Yet 3Com trades for just 6.4 times this expectation -- even though the firm also has 59 cents a share of net cash on hand. OK, so the estimates are non-GAAP. But the growth -- and solid balance sheet -- is undeniable, as is management's execution.

Fears of how the economic slowdown in China will affect future revenue growth are undoubtedly keeping a lid on the company's shares. But the firm could have worse prospects than relying heavily on a country where 9% GDP growth constitutes a slowdown.

Though disappointed not to have a gain in my 3Com shares after seven months, the downside protection that 3Com's fundamentals have given its stock so far during this unprecedented stock market storm must be recognized as a measure of success.

When the pall dissipates, 3Com appears as good a bet as any to finally benefit from investors trusting value as a support, and growth as real.

This article was written by Jonathan Moreland, whose newsletter, "TheStreet.com InsiderInsights," parses mounds of data on insider trades to find investable ideas.
At the time of publication, Moreland was long 3Com, 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; click here to send him an email.

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