In searching for an investment idea, the thought of finding a
company with strong insider buying, an increase in institutional
ownership, and a short base flashed in my mind. Why
might these characteristics be appealing? There are three
1) Investors, including myself, tend to feel confident when
insiders are purchasing shares. Insiders should have knowledge of
operational success, the outlook for profits, and insight into
company morale. If insiders are buying, it suggests they
are positive about future profitability and the potential for
stock price appreciation.
2) Institutions usually do their homework and tend to think
more strategically. They are not fly-by night
investors. Furthermore, they can have greater access to
company management than most retail investors. If
institutions are buying, it should be a vote of confidence in the
3) A short base can fuel for a rally. Shorts have to cover and
shorts face unlimited losses if a stock price continues to
rise. Bottom line, a short base is potential buying power,
especially if a company starts to find upward price momentum.
Given this back drop, I ran a screen which looked for stocks
with a short base over 25% of the float, a six month change in
insider ownership over 50%, and an increase in institutional
ownership over the past three months. Two stocks met the
criteria: WhiteWave Foods (
), Zacks Rank #2 (Buy) and CST Brands (
), Zacks Rank #3 (Hold).
WhiteWave and CST are spin offs:
One of the surprising links between the companies rests in the
fact that they are both relatively recent spin offs.
WWAV was part of Dean Foods (
), while CST was part of Valero (
). Academic literature has discussed the idea that spin
offs create value, and can outperform the market for as long as
three years after the spin off date. CST began
trading in April, while WWAV started trading in February.
Both companies are early in their spin off state.
Looking at WhiteWave:
WWAV produces and markets plant based foods and beverages,
coffee creamers and beverages, and premium dairy products.
The company has exposure to the U.S. and Europe and generated 10%
sales growth in the U.S. and 13% sale growth in Europe in the
last quarter. Guidance for Q3 was slightly lowered compared
to the consensus, but price reaction positive with shares up on
the day of the earnings release. Operational costs
are expected to moderate and trade seems to be looking for
margins to expand as the company gets on its feet post the spin
The table displays a few valuation measures for WWAV. It
looks expensive compared to its peer group on the basis of
forward earnings, but relatively inexpensive to the Zacks
Consumer Staples sector based on the price to sale and PEG ratio.
WWAV offers a way to play for increased consumer focus on
healthier and organic foods.
Looking at CST:
CST operates fuel stations and convenience stores with 1900
locations in the Southwest U.S. and Eastern Canada. The
company has a strong history of generating free cash flow and
free cash flow has chopped higher from $148 mln in 2009 to $240
mln in 2012. This equates to a 17.5% annualized growth rate.
CST has traded range bound since May. Technically, traders may
reposition on a breach of what has been a $30.50 to $34.00
CST has trade traded with a firm tone in recent sessions given
poor profit results at its competitors. Travelcenters America (
), Susser Holdings (
), and Pantry (
) reported weak results due to narrow gasoline margins. The
table below displays the forward PE ratio and expected earnings
per share outlook for CST and its competitors.
CST is showing a PE ratio on the higher side of the range and
a slow estimated 2014 EPS growth rate. This may be a
headwind to higher prices. However, the firm tone of the
stock prices in the face of downward profit estimate revisions to
the sector is curious and hints positioning may be lending
support. PTRY, TA, SUSS, and CST have all seen profit
estimates cut over the past 30 days.
Gasoline prices have eased the last week, and refinery
utilization rates have been over 90% in the past seven weeks.
Furthermore, the days supply of gasoline was 24.8 in the
week ending August 2
compared to 23.6 a year ago and looks comfortable.
Determining the price of gasoline is tough, especially in
hurricane season, but the combination of refinery activity and
gasoline supplies may brighten the outlook for CST's
margins. Flat to falling wholesale gasoline prices may give
retailers like CST some ability to lift margins.
WWAV and CST offer investors the tailwind of institutional and
insider interest. Earnings estimate revisions give WWAV a
friendlier fundamental backdrop than CST, but a continuation of
very current trends in the gasoline market may brighten the
outlook for CST. WWAV would be the pick for more
conservative investors, but CST is worth a look if you have an
appetite for risk.
CST BRANDS INC (CST): Get Free Report
DEAN FOODS CO (DF): Free Stock Analysis
PANTRY INC (PTRY): Free Stock Analysis Report
SUSSER HLDGS CP (SUSS): Free Stock Analysis
TRAVELCENTERS (TA): Free Stock Analysis
VALERO ENERGY (VLO): Free Stock Analysis
WHITEWAVE FOODS (WWAV): Free Stock Analysis
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