This week’s pick is a case of the former: the stock looks bad, acts bad, performance hasn’t been great at the corporate level, yet it has insiders stepping up to the plate and buying.

Agilysys: this week’s stock of the week

Backgrounder

My methodology uses insider trading data from Bluetrader. I monitor hundreds of weekly trades, looking for interesting stories that may slip between the cracks.

Agilysys ($AGYS) is a small cap stock with a market cap around $165 million dollars. It sells point of sales software, hardware and services to the hospitality and retail sectors.

• The stock is down 3% year to date and while its performance over the past year has been very strong (up over 30%), its five year chart looks terrible. The company has not done good by its shareholders over the past 10 years.
• The company is debt-free and loses money. It had $200M of sales in 2011, 94% of which were booked in the U.S. and the remainder in Asia and Europe.
• The company has restructured its business recently, relocated its corporate HQ, reduced operational costs by doing this (eliminating about $15m in expense) and brought in a new management team.
• While it’s burning cash, it does have about $90M (of its $165M marketcap) in cash and short-term securities.

What AGYS does

There are two divisions at AGYS, based on the solution: Hospitality (HSG) and Retail (RSG).

Hospitality (HSG)

Hospitality sells enterprise software solutions, hardware to enable them, and provides recurring services like maintenance, hosting and other SaaS (Software as a Service). Agilysys’s software helps with front-desk management, procurement, reservations, and property management.

The client base breaks down like this:

• 42% commercial and tribal gaming
• 19% hotel resorts
• 17% food service

AGYS has a large install base in hospitality — 67% of this division’s revenues come from service and support.

Retail (RSG)

Agilysys provides an end-to-end in-store solution to retailers based on a point of sale (PoS) installation. Its business/customer is more diverse than its HSG business and breaks down accordingly:

• 41% grocery
• the rest split kind of evenly between big box retail, restaurant, specialty retail, convenience stores

And unlike the more mature hospitality business which makes its money from services for already installed software, AGYS retail group’s revenues are 60% hardware and 35% support and services.

What’s going on here, who’s buying the stock?

1) AGYS CEO Jim Dennedy (Forbes profile) bought $74k worth of the stock this week on the open market. He’s been buying in small increments pretty regularly since 8/2011.

Dennedy is also the Chief Investment Officer at Arcadia Capital Advisors (an affiliate of MD Sass-Macquarie Financial Strategies). His firm’s investment thesis: “it emphasizes active engagement with its portfolio companies to create and enhance shareholder value”.

I couldn’t find out much about Dennedy other than the fact that he seems to be really talented at selling firms:

• As a member of the BOD, he helped steer Navisite (a cloud hosting firm) to a sale to Time Warner Cable ($TWC) for $230M, a 33% premium to where the stock was trading.
• As President of Engryo, he sold his firm to Microsoft in 2007, which is now a big part of Big Softie’s Server and Cloud Platform
• As a board member of Entrust, he helped sell his firm to private equity firm, Thoma Bravo

So, Dennedy appears to be a skilled investor in the software/services space with good operating experience to help effect change in his portfolio companies. Arcardia appears to be a $500M fund that targets small companies it feels “probably shouldn’t be public”. It has 12-15 long holdings (so concentrated positions) and a handful of shorts.

MD Sass, by the way — the affiliated company of Arcadia — is pretty darn interesting. They manage what appears to be around $7 billion in a variety of strategic vehicles (of which one is Dennedy’s Arcadia).

2) The CFO of AGYS, Robert Ellis bought $55k worth of stock this week. When CFOs buy, I listen. Just ’cause they’re CFOs.

3) Kyle Badger, General Counsel of Agilysis, $75,000 also bought in 11/2011

So, we’ve got clustering (multiple insiders buying around the same time) and consensus (all buys, no sales).

What it looks like is going on: setting the stage for a buyout

This is PURE CONJECTURE so take it with a bucket (a trough) of salt. Listen, Dennedy is there at AGYS to make a profit.

He’s shown that he can contribute to getting smallish software and services companies bought by larger ones and he’s onboard to do that. So, the intermediate question is whether he’s also there to turnaround the company.

For what it’s worth — while there has been talk of a turnaround, I’ve seen enough upset customers online who feel like they’ve been left behind to say that it hasn’t happened (or at least, customers aren’t feeling it yet). There’s been talk of some nice new products being rolled out but it appears slow to happen.

In the meantime, the company is cutting costs (relocate), stemming its losses –> I assume in an effort to bide it time so management and the board can find a buyer.

And Dennedy et al were buying the stock after a dssapointing earnings report when the stock got whacked.

Also an organic opportunity

That said, there is opportunity to turn this thing around and make a nice business out of it.

• go international: AGYS has an opportunity to partner internationally to expand — Asia is probably a good place to start.
• leverage the install base: with all those machines in the market, Agilysys can develop other services to cross sell to its existing (happy) clients
• mobility solutions: PoS is moving more and more into mobile solutions. AGYS can play and compete there
• expand specialty retail and franchise business: make a stronger push into food service specialty and chain hotels

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This should not be construed as investment advice. I’ve tried my best to be as faithful to the story as I could, using sound resources to help describe the insider trading activity at leading companies. But you should definitely do your homework — don’t base an investment decision off this information.

by Zack Miller

It started slowly last week, and it is accelerating at a very fast pace this week.

After weeks of being bullish, Insider Sentiment is turning bearish

We know of Chipotle and Panera but now we’re seeing turnaround stories at last week’s pick, Cosi ($COSI). By the way, the past 2 insider trading picks are up 14.54% (COSI) and 10.91% (CFX) since I’ve written about them.

And now, does Carl Icahn have his sites set on Wendy’s?

That’s a stretch but Jack Wasserman, who sits on both the Wendy’s board of directors as well as on Icahn’s board was buying stock this week. His small open market purchase of 2000 shares this week means he’s bought over 24,000 shares since 2007.

This week’s pick: Wendy’s ($WEN)

His buying — along with 5000 shares picked up by General Counsel Scott Toop — was dwarfed by Nelson Peltz’s continued investment in the small, underperforming restaurant chain. Peltz’s investment vehicle, Trian Fund Management, added another 1.25M shares this week or over $6 million worth.  He now controls over 105M shares or 27% of the company.

Peltz is a key player in the Wendy’s story. He was instrumental in merging Arby’s with Wendy’s — a deal which ultimately was just unwound last summer when Arby’s was sold to a private equity firm Roark Capital.  The combined entity of Wendy’s/Arby’s wasn’t enough to jump start either firm’s sluggish sales. Now independent, Arby’s hired some big-gun marketing gurus and is undergoing a rebrand.

Wendy’s – Arby’s = Better turnaround

What’s going on here has everything to do with the future of the Wendy’s own brand and experience.  Wendy’s itself brought in a new CEO, Emil Brolick around the time it sold Arby’s to help it reclaim market share from higher-end competiton like Five Guys and Smashburger.

The Wendy’s experience has lost customers to competitors of all kinds as in the words of the new CEO, customers have grown weary of “a little bit of overpromising and under-delivering”.

Brolick isn’t resting on his haunches and he has an impactful plan to turn around the firm once loved for its homey, hokey food and marketing. Remember founder Dave Thomas and the Where’s the Beef? Campaign.

The New Wendy’s: Turnaround Plan

Brolick — who ran Taco Bell and worked at Wendy’s years ago — is focusing on a core, back-to-basics turnaround plan focusing on the 3 Ps of Marketing: Pricing, Product, and Promotion.

Pricing:

Brolick’s turnaround recipe has to with getting a better pricing strategy. He’s going to introduce a better balance between low cost and higher value products on the Wendy’s menu.

New Products

Wendy’s built its business off the hamburger and has every intention of protecting that franchise. But new management wants to expand the product innovation into Chicken and Salads while leveraging unique side items.

Promotion

On the promotional side, Brolick intends to get on message better with its current audience before it begins to aggressively market to new customers.

Is the strategy working?

So, the whole plan is about firmly reimaging Wendy’s to compete in today’s world of competitive fast casual.

It’s early in the turnaround story but it’s encouraging to see Peltz buying more and more of the company, as well as other insiders buying the stock. To be successful in this

space, Wendy’s believes it needs to sit in that upper right quadrant, combining an emotional experience with higher prices. That’s how it can distinguish itself from the McDonalds and the Burger Kings and all the newer, trendier burger joints that are so popular now.

It’s not a perfect story — but things are moving in the right direction. This past quarter revenues were up nicely, as sales showed strong growth. Revenues rose 5.6% to $615 million.

But it takes time — and money — to effect a turnaround. Wendy’s stores look old and outdated when compared to the new facilities being rolled out by McDonalds ($MCD).

According to the WSJ:

The new remodels bring in flat-screen TVs, Wi-Fi, a clear view of the kitchen and other elements that Wendy’s says have given its competitors an advantage with consumers in recent years.

The question isn’t whether these changes will help improve the brand’s image, but whether Wendy’s can pull them off economically.

The remodels cost a minimum of $750,000 to $850,000 each, causing Wendy’s expected capital spending to be $225 million this year, a 53% increase over last year.

This includes plans to build 20 new restaurants and remodel 50 company-operated restaurants in North America, all with one of the new designs.

This week’s pick is based on a small ($50,000) insider trade made by Carin Stutz, the new CEO of Cosi (COSI).  It’s a small trade, yes — but the impact and signal of this new CEO’s commitment to growing COSI is the real story here.

About COSI

Cosi’s just a $45M marketcap company and runs premium convenience dining restaurants.  As of August 26, 2011, it had 80 company-owned and 58 franchise restaurants in 17 states in the United States, the District of Columbia, and the United Arab Emirates. Cosi, Inc. was founded in 1994 and is based in Deerfield, Illinois.

Cosi’s got a nice menu and the restaurant is similar in concept to Panera (PNRA), an absolutely great, well-run restaurant and a monster stock (up 389.29% in 10 years).

But COSI isn’t Panera. It’s got a strong brand, menu with potential, and customers who really enjoy it. But runaway hit, Panera, it’s not.

Cosi: A story of poor management and a man named Blum

Here’s what you need to know about COSI

• Cosi’s stock is down -85% over the past 5 years
• The company isn’t profitable and if it doesn’t turn itself around quickly, bankruptcy is a real option
• Top management has been a revolving door
• The company is a perennial laggard, falling behind stronger comparable restaurant chains like Chipotle (CMG) and Panera Bread (PNRA) in sales

• COSI stock went nowhere but down whereas CMG and PNRA were BIG winners for investors over the past 5 years

Cosi Stock Chart by YCharts

Nowhere to go but up for COSI?

In spite of all of this, there are sparks of life for the troubled COSI.

December’s same store sales (SSS) showed that there is life here in the COSI story.

From an article on FastCasual.com:

System-wide comps recorded an aggregate 2.6 percent increase compared to the fourth quarter of 2010. Same-store sales increased 0.9 percent at company-owned locations and increased 5.3 percent at franchised restaurants.

The increases were driven by a 0.6 percent increase in guest traffic and a 0.3 percent increase in check average. Additionally, the positive comp-sales results stemmed from several marketing initiatives intended to drive traffic and build check averages, as well as from seasonally milder weather.

Cosi’s liked by industry analysts, too. According to Hedgeye’s Howard Penny, COSI is a great concept in the fastest growing segment of restaurant, fast casual.

There are not many small restaurant concepts today that that have the potential triple in size

Penny isn’t a slouch, by the way. He’s been a restaurant analyst since he spent 13 years at Morgan Stanley beginning in the early 80s (see his LinkedIn profile)

Some smart money in COSI

There’s also smart money in the COSI story. Brad Blum, who runs Blum Capital and is a 7% holder of COSI stock, sees a lot of potential in a COSI turnaround and has done his best to become a thorn in management side.

He has his own plan to turn Cosi around:

The most important pillar of the vision for Cosi is the formation of a closely aligned and well-functioning team of qualified, talented, experienced and motivated people who would work well together to bring to life a clear, concise and compelling vision for the Cosi brand. Once this is established, the leadership and the entire Cosi team will be keenly focused on flawless execution to achieve profitability, significantly improve company performance and greatly increase shareholder value.

The overarching objective is to drive the Cosi brand to its rightful place as a key player in the most dynamic segment of the restaurant industry: Fast Casual. Clearly, the successful attainment of this status will drive significant shareholder value for years to come.

Blum’s been exchanging nasty letters, lobbying for the ouster of the Board of Directors and senior management.

“You must now cease and desist from making these types of inflammatory and grossly incorrect statements to mislead the very people who have suffered under your leadership,” Mr. Blum wrote. “It appears you are trying to pacify people and buy time while you continue to turn out meager results.”

When that didn’t happen, he threw his own hat into the ring, offering to run the company for just $1 per year.

That’s not actually as crazy as it sounds. Blum previously ran Burger King as its CEO and was instrumental in significantly improving the firm’s financial performance.

To drum up support for change at COSI, Blum lobbied shareholders to express their frustration at the current BOD’s performance.

It didn’t quite work — they didn’t hire Blum.

But they didn’t promote from within either.

In fact, they hired Carin Stutz, who used to be a senior operations executive at Brinker (EAT), a global restaurant chain that runs Chili’s.

And it was Stutz’s purchase of 65,650 shares on January 31, 2012 that triggered this BlueTrader Insider Bullish Alert.

Market reaction to Stutz’s purchase

The market responded very positively to the news that COSI’s new CEO was spending her own money to buy some stock (even though she was granted a million shares when the firm signed her. This seemingly insignificant buy got investors juiced and the stock was up almost 25% at one point, settling down with a +13% gain on the day.

COSI is a penny stock and is a major turnaround play. So, it’s risk on. But new CEO Stutz is a real player and having Brian Blum’s watchful eye (as well as his investment dollars) make this story worthy of our attention.     by Zack Miller

Activity was the most concentrated in the Technology sector, where 115 insiders filed trades having an aggregate market value of $1.2 billion. Rounding out the top three sectors were Financials (86 trades for $52 million) and Consumer Discretionary (67 trades for $57.1 million).

The largest open-market transaction of the week was in AVGO stock, where 5 insiders sold 32,725,000 shares for a total of $1.1 billion. The biggest buy last week was for 241,333 shares of VMW, worth $19.2 million.

Largest insider buys of the week

Largest insider sales of the week

In the week ended September 30, we recorded 471 open-market insider trades at 248 companies having a total value of $436 million. Transaction dollar volume was 22.9% lower than the previous week and 64.6% lower when compared to insider trading activity a year ago. Purchases accounted for 50.7% of all open-market trades last week. Our insider sell-to-buy ratio, which excludes derivative conversions and certain other types of transactions, ended the week at 1.04, down from a previous reading of 1.27. On average, a sell-to-buy ratio below 4 is considered bullish, while readings above 7 are bearish.

For the 8th consecutive week, activity was the most concentrated in the Financials sector, where 114 insiders filed trades having an aggregate market value of $35 million. Rounding out the top three sectors were Consumer Discretionary (96 trades for $225 million) and Technology (57 trades for $85.1 million).

The largest open-market transaction of the week was in AZO stock, where 3 insiders sold 304,723 shares for a total of $99.4 million. The biggest buy last week was for 274,249 shares of VMW, worth $23.1 million.

Largest Insider Buys of the Week

Largest Insider Sales of the Week

Insiders continued to purchase shares rather aggressively this week, which we interpret as a sign that equities, on average, are fairly valued. Nevertheless, valuation continues to take a back seat to a shaky underlying macro backdrop. The Federal Reserve’s “Operation Twist” did little to quell market volatility, as the S&P 500 sold off sharply to levels flirting with its August 8 low. A Greek default has been priced as a matter of “when”, not “if”, and the question on investors’ minds remains how far problems will spread. With such a high degree of uncertainty, we continue to view the risk/reward profile of equities as poor.

For the 7th consecutive week, activity was the most concentrated in the Financials sector, where 130 insiders filed trades having an aggregate market value of $123.9 million. Rounding out the top three sectors were Technology (112 trades for $71.4 million) and Consumer Discretionary (105 trades for $91.3 million).

The largest open-market transaction of the week was in EXLS stock, where 3 insiders sold 6,000,000 shares for a total of $138 million. The biggest buy last week was for 6,000,000 shares of JEF, worth $75.5 million.

Largest insider buys of the week

Largest insider sales of the week

Insiders have been buying at an impressive pace in recent weeks; a signal that equities are fairly valued. Still, the fact that the Federal Reserve has extended its unlimited swap lines with European counterparts (on the third anniversary of Lehman’s collapse, to boot) is an ominous foreshadowing of a credit event that could happen at any moment. Caution remains the order of the day, even in the face of the S&P 500 having its best week in recent memory.

For the 6th consecutive week, activity was the most concentrated in the Financials sector, where 182 insiders filed trades having an aggregate market value of $58.2 million. Rounding out the top three sectors were Technology (136 trades for $245.3 million) and Consumer Discretionary (118 trades for $61.7 million). There was a large spike in activity in the Basic Materials sector, where the number of trades filed was up 116% on the previous week.

The largest open-market transaction of the week was in DG stock, where 11 insiders sold 57,507,840 shares for a total of $1.9 billion. The biggest buy last week was for 174,950 shares of HES, worth $10 million.

Largest Insider Buys of the Week

Largest Insider Sales of the Week

As we have been writing for several weeks, strong insider buying is a signal that equities are fairly valued. Still, we believe share prices will fall further because the sovereign debt crisis in Europe is just heating up and the global economy is on shaky footing.

For the 5th consecutive week, activity was the most concentrated in the Financials sector, where 203 insiders filed trades having an aggregate market value of $45.6 million. Rounding out the top three sectors were Technology (125 trades for $254.9 million) and Consumer Discretionary (117 trades for $34 million).

The largest open-market transaction of the week was in INTU stock, where David H. Batchelder, a director of the firm, sold 3,037,720 shares for a total of $144 million. The biggest buy last week was for 862,800 shares of MLI, worth $37.6 million.

Largest insider buys of the week

Largest insider sales of the week

For the past four weeks, insiders have purchased shares rather aggressively despite extremely high levels of macroeconomic uncertainty. We continue to believe that although the stock market is fairly valued, a slowing global economy and the lack of a concrete solution to the European sovereign debt situation will depress share prices in the coming months.

For the 4th consecutive week, activity was the most concentrated in the Financials sector, where 189 insiders filed trades having an aggregate market value of $29.3 million. Rounding out the top three sectors were Technology (145 trades for $42.1 million) and Consumer Discretionary (122 trades for $306.4 million).

The largest open-market transaction of the week was in LGF stock, where Icahn Partners Lp, a large shareholder in the firm, sold 22,081,000 shares for a total of $154.6 million. The biggest buy last week was for 11,040,500 shares of LGF, worth $77.3 million. The net effect of these transactions is that entities connected to Carl Icahn are unloading their stakes in Lions Gate, which should serve as a bearish signal for the stock.

Largest Insider Buys of the Week

Largest Insider Sales of the Week