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Monday, August 21, 2006

Insider Buying Argon (STST) & Selling Coventry Health (CVH)

By Yaser Anwar, CSC of Equity Investment Advisors


Military revolutions occur repeatedly throughout history. They are as often based on broader social developments as on military technology; generally they favor offence. The current revolution in military affairs revolves around three advances.

The first is in gathering intelligence. Sensors in satellites, aircraft or unmanned aircraft can monitor virtually everything going on in an area.

The second is in processing intelligence. Advanced command, control, communication and computing systems make sense of the data gathered by the sensors and display it on-screen. They can then assign particular targets to missiles, tanks or whatever.

The third is in acting on all this intelligence in particular, by using long-range precision strikes to destroy targets. Cruise missiles, guided by satellite, can hit an individual building many hundreds of miles away.

US armed forces have these new systems already up and running thanks to companies such as $501.78 mil market cap. Argon ST (STST), a Fairfax, VA-based maker of systems and sensors for the U.S. military and intelligence clients.

Given that the U.S. Navy accounts for about 70% of STSTs sales and other U.S. government entities (CIA, FBI, NSA etc) another 20%, it has been doing rather well: sales and profits in fiscal 2005 both doubled to $271.8 million and $21.8 million respectively from the previous year.

Earlier this month STST posted third quarter net income of $5.2 million, or 23 cents a share, down from $5.9 million, or 28 cents a share a year earlier has not dampened enthusiasm for the stock, particularly amongst its directors.

Vice Chairman & Vice President S. Kent Rockwell: he recently snapped up 50,000 shares at an average price of $21.27 each, and total cost of $1,059,527. After all, STST had already warned in its second quarter report issued last May that delayed bookings would hurt third quarter revenue but that historical levels of growth would resume in the fourth quarter.

At $22.67, on a Forward PE of 17.57, STST is still a growth stock.

INSIDER SELLING: Coventry Health Care (CVH)

With the relentless increase in premiums, employers might sympathize. John J. Ruhlmann, VP of $8.59 billion market cap., Coventry Health Care CVH.

He has recently sold 10,700 CVH shares at $53 each, pocketing $567,100. Though this isn't a cause of concern as it was through an automatic selling plan.

CVH, last month posted second quarter earnings of $135.5 million, or 84 cents a share compared with $129.5 million or 79 cents a share a year earlier.

Even better, CVH increased its forecast earnings for the year to between $3.44 and $3.50 a share from the $3.42 to $3.48 a share prediction made only last April.

But in the second quarter margins slipped and medical costs rose nearly 22%. More worrisome, perhaps, is that membership growth was a mere 3% in an industry where size really does matter.

Started in 1998 when CVH doubled its size by acquiring Principal Financial Groups health care unit, CVH provides managed health care services to 2.54 million enrollees in some 15 states, mainly in the Midwest, Mid-Atlantic and Southeast.

This slowdown in membership growth might be the harbinger of slower profits growth, with the stock selling at 16 times earnings.

Sources: SEC Filings, Insider Moves & Y! Finance

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