Insider Trading Be Damned

Would you touch the stock of a company whose chairman, secretary, and a former director are accused by the Securities & Exchange Commission of insider trading in the company's shares?

Believe it or not, some smart-money pros are buying shares of Shared Medical Systems -- a company in a pickle. These investors argue that Shared Medical's stock is compelling despite the recently announced insider-trading charges against Chairman and CEO R. J. Macaleer, Corporate Secretary James C. Kelly, and former Director Clyde Hyde. The SEC alleges the trio knew that earnings had declined -- and sold shares before the announcement. The company, which provides information systems to hospitals and health care companies, denies the SEC charges that the three sold stock in 1985 to avoid the expected drop in the shares.

One reason to get into the stock now, says one pro, is whispers of a "friendly buyout bid" from a major data processing company. With the stock down to 18 a share from 23 in September, it is a bargain, he explains. Some investors also note that the stock is an earnings-turnaround play. "Earnings and orders have been rebounding, and the company appears in a good position to benefit from efforts by hospitals to control their costs," says Jim Awad, president of BMI Capital. Shared Medical "is a leader in its industry, has a strong balance sheet with no debt, and isn't sensitive to the economy," he adds. Awad says the stock is worth 30 based on earnings alone. A takeover investor puts the buyout value of Shared Medical at $40 to $45.

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