When executives of a company step in and buy its stock, it can
provide a glimpse into an overlooked or misunderstood value
opportunity.
Sadly, these insiders are often lousy
market
timers. They tend to acquire
shares
after a stock has lost a lot of value (even as they think the
company's operating outlook remains bright). In many instances, the
selling pressure isn't yet finished, and these insiders simply
jumped in too soon. The good news: you can
profit
from their bad timing by picking up shares at lower prices than
what insiders paid for them.
You can find a clear example of this with advertising firm
MDC Partners (Nasdaq:
MDCA
)
, which is a member of my
$100,000 Real-money Portfolio
. Insiders have been buying this stock for an extended period, even
as it has drifted ever-lower.
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I think this stock is a deep bargain for its own intrinsic reasons,
and those rounds of insider buying at much higher levels give me
that much more confidence.
Here are three other attractively-valued stocks that are now much
cheaper than what insiders paid for them.
1. Halozyme Therapeutics (Nasdaq:
HALO
)
I wrote about this stock
in mid-April
right after it was crushed. Halozyme is pursuing a range of
drug-development opportunities with major pharmaceutical firms, so
the recent pullback could present a solid buying opportunity.
Randal Kirk, who usually knows when to buy low and sell high, had
been buying all the way. He picked up stock last summer when it was
trading at $6, then in November 2011 when it moved up to $8, and
then made his largest purchase yet (1.36 million shares) when the
stock had moved past $10 in February. Shares are now right back at
$8, though as I mentioned a few weeks ago, it's far too soon to
write this company off.
2. Titanium Metals (NYSE:
TIE
)
Harold Simmons has never been shy about spending large sums of
money to gain control of companies. He's now chairman of
Valhi (NYSE:
VHI
)
,
NL Industries (NYSE:
NL
)
,
Kronos Worldwide (NYSE:
KRO
)
and Titanium Metals. That's the title they give you when you own a
lot of company stock. In the past two years, he's been a steady
buyer of all four companies, boosting his stakes even more.
Only Titanium Minerals has been a losing recent investment for him.
He started buying in late 2010 when shares were trading above $17.
He bought hundreds of thousands more shares at that price last
spring, when shares were stuck in the $17 range. By the time shares
fell below $17 last June, he was still buying. And he's been buying
ever since, even though shares are now around $14.50.
Why is Simmons so keen to own millions of shares of Titanium
Metals? Because he knows the
commodity
plays a key role in the generation of fuel-efficient airplanes. And
though global titanium production is fairly constant, demand is set
to rise. "Aircraft build rates provide visibility on a likely
titanium market tightening in [2013]. Investors may be wary of
titanium stocks following multi-year 787 and A380 delays, but
accelerating deliveries of these planes should be a
catalyst
for specialty metals stocks," note analysts at Citigroup.
They add that because the company mills raw titanium and then
modifies it into key shapes for customers, it can maintain low
costs and high profit spreads. That's why "TIE has significant
leverage
to anticipated demand growth and the highest projected
EBITDA
margins of the group," (that also includes
RTI International Metals (NYSE:
RTI
)
,
Carpenter Technology (NYSE:
CRS
)
and
Allegheny Technologies (NYSE:
ATI
)
.)
Citigroup's analysts have a current $17
price target
but note further upside if the global
economy
and titanium demand get stronger. This stock, currently trading
around $14.50, hit $35 back in 2007 when industry conditions were
aligned. Harold Simmons is well aware of that as he continues to
but this stock at ever-lower levels.
3. Pizza Inn Holdings (Nasdaq:
PZZI
)
This Texas-based restaurant chain has been a sleepy operator of
eponymously-named pizzerias. During the past year, management has
been seeking to boost results by trying out a new style of eatery
called Pie Five Pizza. The twist: this chain offers a range of
toppings and crusts and will have your food in front of you in five
minutes. The half-dozen Pie Five stores have delivered fairly solid
early returns in terms of sales and profits, though they still
constitute just a fraction of the total store base.
[block:block=16]More importantly, insiders jumped the gun. They
bought more than $80,000 worth of stock during the winter at an
average price of around $5 a share. Shares have dropped 30% since
then, pushing the stock even deeper into micro-cap territory. It's
unclear if the Pie Five concept will succeed, but at least
investors are now paying a lot less to find out.
Risks to Consider:
These stocks have stumbled after insiders were
bullish
, so it pays to deeply research what has transpired since to ensure
that the insider-induced investment thesis still applies.
Action to Take -->
Many stocks move higher after insiders file their transactions with
the Securities and Exchange
Commission
. It often pays to let the insider-inspired bump pass and see if
shares pull back. Indeed, it's rarely wise to pay more for a stock
than insiders did, as they may end up being sellers by the time
you're ready to buy. Conversely, when shares slump after insiders
buy, your purchase may be followed by more buying from those
insiders. You may find that following this path for any of the
three stocks I mentioned above pays off with substantial gains.
[
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority owns shares
of TIE, in one or more if its real-money or investment
portfolios.