SPIDER-MAN RETURNS

to theaters in May. Shares of his employer,

Marvel Entertainment

Don't buy the stock based on something so fleeting as a film release date. Do consider some of Marvel's other advantages. As we'll see in a moment, the company is remarkably profitable and reasonably priced. Its attempt to cut out Hollywood middlemen could pay off nicely for shareholders, and shouldn't prove ruinous otherwise. Also, one of its board members recently spent a quarter million dollars on Marvel shares, earning the company a spot on our Insider Buying screen.

Insider buying refers to the purchasing of a company's stock by its executives, board members and so-called beneficial owners, which are people or groups that hold more than 10% of outstanding shares. Insiders are permitted to buy and sell shares as they like, so long as they don't trade based on important company information that hasn't yet been made public, and so long as they report their trades to the public within two business days. Investors can profit from paying attention to such trades. On average insiders beat the broad market by several percentage points a year, long-term studies suggest.

The easiest way to look for recent insider buying is to use a stock-screening tool like the one offered by SmartMoney.com. It recently reduced an 8,000-company database to eight companies with large insider buys over the past six weeks and price/earnings ratios that are below their industry medians.

Marvel Comics got its start in 1939 in New York City's Times Square under the name Timely Publications with the release of its first book, called Marvel Comics and featuring The Human Torch. Today's company and its shares date back to 1998, when Marvel re-emerged from bankruptcy. The company commands an army of more than 5,000 characters, including Spider-Man, The Hulk, the Fantastic Four, the X-Men and Captain America.

One of the lessons Marvel learned from bankruptcy is that making things like toys and videogames is expensive and risky. Better to sell the rights to companies like Hasbro and Activision and simply collect licensing fees and a revenue share. In 2000, less than 10% of the company's sales came from licensing fees. Last year, more than a third came from licensing. This year more than half of sales are expected to come from licensing, thanks partly to a new deal with Hasbro.

Over the last 10 years, Marvel shares have supplied enough spills and thrills to match any superhero's exploits. At one point shortly before the release of the first Spider-Man film, initial investors had lost 90% of capital. Now they're up more than fourfold, and have done about three times as well as the broad market. We drew readers' attention to the stock in June 2003 after it turned up in a search for share-price momentum. Those who bought then are up 76%. The shift to licensing around 2001 marked the start of the stock's recovery.

That raises two questions for today's shareholders. First, is the stock too volatile to be embraced? Second, if Marvel turned things around by getting out of the business of making things, should investors be concerned that the company now plans to make a few movies with its own money rather than outsourcing the job to Hollywood?

The volatility makes the stock less attractive, but not unattractive. This year's earnings, for example, are poised to more than double while next year's are expected to dip 8%. That's because Marvel is a hit-driven company, and this should be a hit year. Movie releases include "Spider-Man 3," a sequel to "Fantastic Four" and "Ghost Rider," which opened in February and has thus far grossed $114 million. Together, previous Spider-Man and Fantastic Four films had grossed more than $2 billion by the start of the year, while sales of videogames, toys and merchandise based on the films had totaled about $1.4 billion. Investors are never pleased with an earnings decline like the one Marvel faces in 2008. But average out the growth for this year and next and you're left with an enviable rate of more than 60%. Also, Marvel has a recent history of conservatism in its financial estimates. Since 2003 the company has beaten its profit and sales forecasts by an average of 56% and 29% a year, respectively.

Marvel's entry into the movie business isn't without peril, but it does seem to have tilted the odds heavily in its favor. Marvel plans to make 10 movies altogether, beginning with "Iron Man," scheduled for release next year. If the films prove successful, its share of the profits will be much higher than under previous licensing arrangements. And if they fail, they'll fail mainly for the lender, Merrill Lynch. It provided more than a half billion dollars at about 8 1/4% interest collateralized only by box office rights to a dozen characters involved in the films. In other words, if the superheroes earn, Marvel collects, and if they don't earn they simply go to work for Merrill for awhile.

Shares of Marvel can be had for 20 times forecast 2007 earnings. That price/earnings ratio would be a bargain for a toy maker (average: 24) or a movie studio (27). Marvel is both of those, with a publisher (also 27) mixed in. We have no idea whether the stock will dip shortly after Spider-Man has left town, as it has in the past. But patient investors would do well to count on a capital-gains sequel.