What would compel insiders to buy up company stock? After all,
they typically receiveshares anyway through annual stockoption
grants -- for free. Somemarket watchers suggest that these folks
buy stock simply as a public relations gesture to show their
support for the home team. I've never bought that line. Who would
be foolish enough to commit funds to a stock that may be headed
Instead, these insiders should be treated as a sign. They don't
always have the ability to signal that a stock has truly bottomed
out -- the broader market takes care of that. But they can at least
clue us in that there may be some real merits to the stock at
current valuations, even if few people outside the company think
Here are three beaten-down stocks insiders are loading up on...
1. RadioShack (NYSE:
The electronics retailer has become widely reviled by the
investment community for a long string of weak quarters. We've
already seen companies in this space such as Circuit City and
CompUSA go broke, and the stock price chart may be implying a
similar endgame for RadioShack.
Yet, in the final days of July, seven company insiders stepped
in and bought a collective 220,000 shares at an average price of
$2.53 a share. This caused the stock to rebound a bit to around
$2.81, and it is currently trading at about $2.90.
Right as those insiders were buying, media reports were
circulating that RadioShack may be headed for deep financial
distress. But is that really the case? Sure the company's $680
million in short-term andlong-term debt is worrisome, but
RadioShack does have more than $500 million in cash. And the
company's $800 million ininventory could be used ascollateral with
factors (firms that lend against secured assets), so talk of
bankruptcy filings appears nonsensical.
The key is to see how management plans to turn things around. That
insider buying is likely to be paired with restructuring efforts,
so this is a name worthy of further research.
2. Pinnacle Entertainment (NYSE:
Four different insiders bought a combined 55,000 shares (at an
average price of around $9.50) in late July of this operator of
casinos in the U.S. Gulf Coast and Nevada. Pinnacle has delivered
mixed results in its financial reports in recent periods, as
ongoing investments in new or upgraded casinos have dampenedcash
Insiders have been buying up shares over the years, especially
after they began falling from the mid-teens in early 2011 to the
recent $10 range. This stock meets another criterion I like to see:
The company announced plans to buy back up to $100 million in
stock, shrinking the share count by more than 10%. Also of note:
Pinnacle has exceededEPS forecasts by at least 30% for four
What will get this stock moving back toward the mid-teens? The
winding down of its various investments in new or upgraded
facilities should allowfree cash flow to finally shine. The company
has generated negative free cash flow for five straight years while
it has been in growth mode, but management appears to be committed
to generating positive free cash flow starting in 2013.
3. Overseas Shipholding Group (NYSE:
The shipping industry is still recovering from the GreatRecession
of 2008-2009. Not only has demand remained below prior peak levels,
but many ships began construction five years ago and ended up
creating a glut of excess of capacity.
You canspot ugly stock charts across the board in this sector,
and OSG's five-year chart is as troubling as any.
Overseas Shipholding has the added pressure of a very
weakbalance sheet , and some have expressed concerns that thedebt
load will eventually render the stock completely worthless. The
only solution:asset sales and debt restructuring.
In that light, it's noteworthy that company director Thomas
Coleman just announced a purchase of 100,000 shares at $5.82
apiece. That's the biggest open market purchase he's made in at
least a decade.
Analysts at Dahlman Rose draw a clear conclusion: "We view this
as a signal that a positive resolution with its lenders is on the
horizon." They add, "An agreement with its lenders and/or a sale of
certain business units should have a substantially positive impact
on the shares."
Investors still need to do some homework on this one. The
de-risked balance sheet is helpful, but industry dynamics need to
improve for this stock to really get moving. In a second-quarter
report on Aug. 1, management conceded that any discussions with
lenders should be viewed in order to help OSG "manage through an
extended downturn." So think of this as more of a potential trade
on the debt restructuring than an investment right now.
Risks to Consider:
Insiders have a poor sense of timing and are sometimes a bit
early with their purchases, so be prepared for more possible
downside in the near term.
Action to Take -->
Over the longer term, these insider buying signals canyield big
gains. That makes this a good time to dig more deeply into these
fallen stocks, as operations may be on the mend within a few
-- 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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