Ever since he took the reins of
Citigroup (
C
)
in mid-October, Chairman Michael O'Neill has been making the rounds
with the company's key stakeholders. And as he's found, the global
banking giant still has many detractors in theinvestment community.
In fact, even the numbers say so. Citigroup is valued at $103
billion, but itsbalance sheet says the company is really worth $155
billion.
So O'Neill has done what the disciples of investment gurus
Benjamin Graham & David Dodd would do: he's bought company
stock. In recent days, Citigroup's chairman has acquired more than
$1 million in company stock -- with his own money.
Graham & Dodd developed a powerful -- yet simple --
investing concept: We have no way of really knowing what a
company's future sales andprofit prospectswill really look like.
Instead, we only know what a company already possesses. By tallying
up the assets on a balance sheet and then deducting the
liabilities, we know what a company would be worth if it were
liquidated tomorrow. And any stock themarket values at a price
that's lower than thenet assets on the balance sheet is a clear and
certifiable bargain.
Citigroup's O'Neill is actually part of a recent mini-trend. An
unusually large number of insider purchases have been made at
companies trading belowbook value . Graham & Dodd would be
proud. Here are five "below book" stocks with recent clusters of
insider buying.
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1. CYSInvestments
|
CYS Investments (
CYS
)
director Jeffrey Hughes recently acquired roughly $125,000 of
company stock at an average price of $12.65 per share. CYS,
which invests inmortgage bonds , actually should be worth
around $14.50 a share, when measured by tangible book value.
Hughes is also likely enamored with this firm'sdividend yield
, which now exceeds an amazing 14%.
I alsoshares trade below book.
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2.
WesternAsset Mortgage Capital |
Like CYS,
Western Asset Mortgage Capital (
WMC
)
trades mortgage-backed securities and trades at around 95% of
tangible book value. And as is the case with CYS, it also
sports an eye-popping 17% dividend yield.
Director James Hirschmann has taken advantage of these
value metrics, acquiring roughly $300,000 in stock in recent
weeks.
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|
3.
Annaly Capital Management |
Annaly Capital Management (
NLY
)
operates in the very same industry as CYS and Western Asset
Mortgage. And it too sports an impressive 13.6% dividend
yield and trades at just 84% of tangible book value. In this
instance, company Director Kevin Keyes bought $1.4 million of
stock in mid-November.
Why do these firms sport such high-yields? Because they
are unlikely to maintain very richdividend payments when the
pricing dynamics in the mortgage-bond industry begins to
change. TWO) and concluded that these "high-yield stocks
that are actually undervalued, despite the likelihood of a
dividend cut." The fact that these stocks trade below
tangible book value simply underscores that point. For that
matter, Two Harbors also trades below book, sports a
double-digityield and has seen recent insider buying as
well.
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4. Chesapeake Energy
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Did Director Brad Martin buy roughly $700,000 of this energy
driller because shares trade at just 74% of book value? Or
did he buy shares because they have failed to rise even as
Chesapeake Energy (
CHK
)
keeps to its pledge of majorasset sales?
Perhaps he's been a buyer because natural gas prices are
firming, which should improve Chesapeake's profit picture in
coming years. We'll never know his reasons, but with shares
so far below the $23.77 book value, he's not taking on a lot
of risk.
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5.
Tuesday Morning |
Director Steven Becker has acquired more than $1 million
worth of this retailer stock in the past month.
Tuesday Morning (Nasdaq: TUES)
acquires "close-out" merchandise from wholesalers and
distributors, and lures customers in with the promise of
low prices.
The insider-buying comes after an impressive rally for the
stock, which has brought it almost back to book value.
Insiders tend to reflexively buy stock after it has fallen.
In this instance, Becker qualifies as an insider as his firm,
Becker Drapkin, owns about 8% of company stock. The
investment firm is known for its activist stances, so the
recent insider-buying activity may be a prelude to pressure
tactics to get Tuesday Morning to take stapes to unlock
shareholder value.
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Risks to Consider:
Insiders are notoriously bad market times, so don't look at
these buys for signs of a hiddencatalyst that will soon emerge.
Moreover, "below book" stocks can stay that way for an extended
period, as surely been the case with Citigroup.
Action to Take -->
In any investment, you want to findmultiple reasons to own a stock.
Stocks trading at a discount to book is one angle, while strong
insider support is another. The fact that these stocks have both of
these factors in place bodes well for eventual upside.