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HSOA...taken from the IV stock board:

Insiders Place Bets on Global Warming Play

By Michael Brush
Exclusively for InvestorIdeas.com
February 01, 2007

Ever since Al Gore’s movie “An Inconvenient Truth” hit the circuit last year – and spooky-warm weather seemed to confirm his thesis – many investors have been on the hunt for climate change stocks.

What’s more, reports of bizarre weather persist – most recently in Europe which was struck by unusually severe wind storms in January. Since bizarre weather patterns are a symptom of global warming, according to Gore, I’ll nominate Home Solutions of America (HSOA) as my Insiders Corner climate change stock.

This company looks like a great play on the theme for three reasons:

They do clean up and recovery after destructive weather like hurricanes or floods, the kind of odd weather events seem a lot more common these days.
The stock is cheap in part because of a management mishap last year that may really be little more than a tempest in a teapot.
There’s significant insider buying recently plus something we rarely see: A public pledge by top managers that they won’t be selling any stock for at least a year.
Home Solutions expects 30% revenue growth this year. For that you’re paying just ten times forward earnings, based on management projections of 60 cents a share in earnings this year.

Much of the growth should come from continued reconstruction spending in New Orleans and along the Gulf Coast. Home Solutions recently purchased two companies which give it better leverage there. Sanders Morris Harris analyst David Yuschak has a price target of $9.50 on the stock. It recently traded for $6.40.

A closer look

Based in Dallas, TX, Home Solutions has two parts to its business.

A recovery and restoration side helps people pick up the pieces after disasters like flooding, hurricanes, tornados and fires. Customers are chiefly commercial – and many are willing to pay a premium to get their business back in order to avoid downtime. The company has operations in the South, along the Gulf Coast and in California. Home Solutions got about 81% of its revenue from this business in the third quarter of last year – and it’s growing rapidly.

Home Solutions recently bought two companies in this line of work called Fireline Restoration and Associated Contractors. That should help Home Solutions land more business – especially along the Gulf Coast where rebuilding efforts could last for five years or more. “This is a multi-year program and we are clearly seeing activity ahead for the next several years,” said chief operating officer Rick O’Brien in a recent conference call.

The other side of the business, a rebuilding and remodeling segment, provides custom installation of things like kitchen cabinets and countertops. Two big partners here are Home Depot (HD) and Centex (CTX), a homebuilder. This business provides about 19% of revenue, and it was recently growing at about 10% a year. The company hopes to add new partners in homebuilding, to grow on this side.

Some positives

Sales grew an impressive 250% in the third quarter of last year. Revenue came in at $49 million, up from $18.9 million. The growth came from a pick up in work in New Orleans and along the Gulf Coast. But some of it also came from an acquisition, and cost of sales grew in line at 260%.

The company is winning significant contracts. On January 29 it announced about $12 million worth of new contracts. These included deals to help rebuild the National Aeronautics and Space Administration’s Stennis Space Center and infrastructure projects around New Orleans -- including work on the Armstrong International Airport and public schools.

There is a huge short position. In January there was a short position of nearly 13 million shares, representing 17 days worth of volume. A more normal level is around five “days to cover.” This big short position is bullish because if contracts continue to roll in – as the insider buying seems to suggest – then the shorts will have to buy shares to cover, driving the stock up even more.

Some negatives

There’s a lot of innuendo swirling around management which we will get to in a moment. But to me, the most glaring negative is a huge leap in accounts receivable to over $60 million last quarter, which contributed to negative operating cash flow of $13.7 million even as the company reported positive net income. Typically when cash flow and reported earnings diverge by so much, it is not a good sign.

The company claims that over 80% of the outstanding receivables are with insurance companies, the government, Home Depot and Centex – parties that are likely to pay up, in other words. “We anticipate that we'll be cash flow positive on a quarterly basis in the first quarter of 2007,” chief executive Frank Fradella said in a November conference call on the most recent quarterly earnings.

The insider buying

What makes this prediction somewhat credible is that since November 27, insiders have purchased around $600,000 worth of the stock at prices of $5.19 to $5.92. Those insiders included the chief executive, the finance chief and the chief operating officer. In an unusual move by insiders, all three pledged in the last conference call that they won’t sell in the coming year.

This is a sensitive issue because huge insider selling last May contributed to a controversy that lingers today in the form of caution on management credibility.

Home Solutions stock went on a tear last May, in part because it had announced contracts that month with a company called American Renaissance Homes, founded just a short time earlier. Fradella and chief operating officer O'Brien dumped over $12 million worth on May 24 in the rally, at prices between $11.36 and $12.80, according to Thomson Financial.

What Home Solutions failed to mention in its press release that helped spark the rally was that it made a significant loan to American Renaissance Homes to help it get rolling. When this came out, the stock tanked, and the shareholder lawsuits followed.

Was the omission an honest mistake? Who knows – but at this point it may not matter. While doubts about management surely linger, the recent insider buying and contract flow help with Home Solutions’ own repair and recover – and that could continue as long as we see healthy growth and no more surprises.

The bottom line: This is another case of discredited management needing to build its reputation. These things take a long time, but the insider buying and recent contracts suggest this company is on the right track.



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