JONATHAN MORELAND
FOUNDER
INSIDERINSIGHTS.COM

COMPANY: Flow International
TICKER: FLOW (Nasdaq)
PRICE: $13.09 (as of 4 p.m. yesterday)
52-WEEK RANGE: $4.57-$13.63
MARKET CAPITALIZATION: $453.7 million

Jonathan Moreland is a stock market analyst and runs InsiderInsights.com. Flow International designs and manufactures ultra high-pressure water pumps used to cut and clean various materials. Mr. Moreland spoke to David Dalley of The New York Sun and explained why big new contracts, along with institutional and insider buying activity, make Flow an attractive investment.

What does Flow do?

They make ultra high-pressure water jets which are used as cutting machines. Water can be pressurized to cut almost anything, and they’ve found some very high-tech applications. Specifically, they’ve developed a water jet that is extremely precise, which can be used to cut silicon wafers (microchips),and they have a contract with SanDisk to do that. The contract has confirmed that the application is robust enough for commercial use. Another unique application is cutting carbon-based composite materials, which are used, for example, in building aircraft. These materials are very difficult to cut, and it turns out that Flow’s water jets are very good at doing the job. They just won a contract to do it with Airbus.

Why do you like the company?

Well, those two contracts have got the market, and me, very excited. They’re interesting and they’ll generate a lot of growth going forward. And they’re just the beginning. I believe that the numbers estimates out there right now are a bit low.

This stock is also part of a longer turnaround story. It was at around $14 in 2001, and then it sank all the way down to nearly $1 in 2003. Then it had a turnaround, it strengthened its balance sheet, executed well on its strategy, and now the stock is threatening to burst through five-year highs (it’s currently trading at around $13).

Your investment strategy makes use of insider trading data to highlight interesting stocks. What have the insiders been doing here?

Unfortunately, they weren’t buying back in 2003. What I find interesting is that insiders purchased in around March 2005 at around $5, since which time they’ve obviously more than doubled their money. I wish I had paid more attention back then. Insiders getting back in after a stock has already rebounded is a very bullish sign. The fact that they’re still holding onto these profits despite the fact that the stock has soared since is another strong sign.

What really got me excited and what gives me confidence that the turnaround play isn’t over yet is that institutions have taken an interest at these higher prices. There was a PIPE offering (basically where investment firms purchase shares at a discount in a quick but unregistered transaction) in March 2005.From February 22 of this year, the restricted shares (nearly 18 million in all) became eligible for sale. That concerned me but no one has tried to sell yet, despite the big profit they’re sitting on.

What are the risks?

There’s obviously a short-term trading risk. One of the institutional buyers might decide they’ve had enough and sell. But volume has been reasonably good in this stock, and the institutions are savvy enough not to just throw out a 2-million share block onto the market.

Execution is always a risk, too. It’s important for Flow to expand internationally. In terms of water jets, they have 70% market share in the U.S. but only 40% internationally. That presents a big growth opportunity going forward.