Regular readers of my articles know that I spend most of my time
in search of undervalued mid-sized and large companies. There are
so many bargains in the S&P 500 alone, that it simply hasn't
paid to spend too much time on small -- and risky -- stocks in
Yet every portfolio needs a broad cross-section of holdings if it
is to beat the
. This means you should hold a basket of micro-cap and small-cap
stocks alongside your blue-chip holdings. To mitigate the risk that
these small companies stumble badly, it pays to get a vote of
confidence that business is solid. These smaller companies, all
trading below $4, have all seen such a vote of confidence in the
form of notable levels of insider buying.
1. Harris & Harris (Nasdaq:
Recent price: $3.84
This investment firm takes stakes in a wide range of privately-held
technology companies that cater to the biotech and industrial
sectors. The portfolio companies often seek to commercialize
nanotechnologies, which are processes that
miniaturized lubricants, materials and other industrial goods.
The market rout of last summer was hard on this speculative stock,
fell from $5.50 to below $4. They've stayed out of favor ever
since. In fact, shares stood at $25 a decade ago.
Investors are clearly shunning hard-to-value stocks like this one.
In response, management has been conducting an increasing number of
"liquidity-inducing events," by which some or all of the holding is
sold off. Harris & Harris had five such events in 2011 (after
zero in 2010), and recent management comments imply plans for five
or six portfolio sales in 2012 as well.
The value of Harris & Harris' holdings equal $4.38 a share,
meaning you can own the basket of companies at a 12% discount to
the current stock price. With shares below $4, nearly a dozen
insiders have acquired a combined 31,000 shares since the middle of
November, worth more than $100,000.
2. Denny's (Nasdaq:
Recent price: $3.94
Insiders have also been acquiring shares of this quick-service
restaurant operator, highlighted by roughly $500,000 in stock
purchases by company President John Miller in December. Denny's
insiders have been quite
as I noted last summer
Shares swooned in the summer rout after I wrote about the stock,
but shares have steadily rebounded in recent months back to the $4
mark. This stock may make a move on $5 or even $6 in 2012. That's
because same-store sales remain positive, debt is falling and the
share count keeps shrinking. Those are the typical ingredients of a
The debt pay down and share buyback is coming from healthy
, which likely hit around $78-79 million in 2011, and could
approach $85 million in 2012. (Management will lay out 2012
financial targets on Feb.15.) The appeal is in this stock is that
Denny's has taken a series of tough steps in a bad
(such as reducing costs wherever possible), which should really pay
off when the economy turns up.
3. Primo Water (Nasdaq:
Recent price: $2.75
This stock muddled along in the low teens until it posted a
surprise second-quarter loss in late July. The stock lost more than
half of its value and then staged a decent rebounded during the
next few months as management announced plans to augment its
traditional water distribution business (mostly to offices) with a
carbonation drink-making machine, similar to one offered by
But another weak quarter, led by a slower-than-expected rollout of
that carbonated water initiative sent shares to new lows, where
they sit today. Insiders began buying back in mid-August in the
$4.50 to $5 range. But they should have saved their money. In
December, they made a savvier move, picking up around 300,000
shares at a little less than $3. Even that buy is now underwater,
but those most recent trades may pay finally pay off as the
business finally starts to move back into profitability. Analysts
spy an inflection point in the March quarter and rising profits
from there, as rising sales
Taking a look at recent quarterly results, it appears the company
moved too quickly to get its traditional and carbonated water
machines into many new offices. Management appears committed to
letting revenue catch up with the distribution infrastructure put
in place. I'd suggest listening to fourth-quarter results in
mid-February to get a clearer read on the type of profitability
Risks to Consider:
Smaller company stocks would be the first to take a hit if the
European crisis deepens.
Action to Take -->
As I recently noted
, small-cap stocks actually make solid investments -- if the
economy has turned the corner.
Insider activity at these companies implies a bullish outlook for
2012. Denny's appears to be the most stable of the group, but with
perhaps with 30% to 40% upside at best for 2012. Harris &
Harris looks quite oversold and should rally when growth-investing
is back in favor, whenever that era returns. Primo Water has been
performing poorly in recent quarters, but has the makings of a
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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