In stressful times like these, it's important to distinguish
between investors' appetite for stocks in general and the actual
outlook of each company. The market plunge is related to top-down
concerns about the U.S.economy , but a bottom-up approach is still
warranted. This is because -- despite the weak stock market
performance -- a company can do well even if its industry isn't
doing that well. In some cases, even though a business is doing OK,
the stock price is signaling distress and hitting all-time lows.
This is when officers, directors and major shareholders
(collectively known as insiders) usually act. They have the best
view of the company's stock fundamentals, so they gauge the
company's health by the day. So when a choppy market pushes the
stock down below any sort of
, these insiders can respond with their checkbooks. In fact,
there's been a massive wave of insider-buying since the market hit
the skids on July 22. To cover all of the names would take quite
some time. But this should send a clear signal that there is value
to be had in this market.
To focus investors' sights, I've limited the view to companies with
at least $400,000 in recent insider-buying. I've also tossed out
stocks that have rebounded as a result of this buying pressure. All
of the stocks in the table below trade for less than what insiders
have paid for them. But don't let that dishearten you. Insiders
often have a long-term view and are prepared to wait out any
The book-value buyers
Financial stocks can often be found on insider-buying lists during
tough times because insiders know tangible
is a floor that is rarely breached. When a company's
falls below this level, a solid buying opportunity emerges.
Morgan Stanley (NYSE:
, for example, is now valued at about $36 billion, well below the
$47 million in tangible book value found on its
. This roused the interest of a range of company directors on the
week of Aug. 1, as they bought nearly $4 million in stock when it
hit a two-year low price of $19.28.
In a similar vein,shares of
Cincinnati Financial (Nasdaq:
proved too tempting to insiders. Bad weather this year has led to a
spike in property claims for this Midwest insurer. As a result,
profits have been slumping despite a sharp rebound expected for
2012. But it's the base of assets on which insiders are focusing.
Cincinnati Financial has more than $11.75 billion of investments in
reserve in case of a rainy day and roughly $5 billion in tangible
stockholder's equity. This base of equity is more than 25% above
the current market value for the entire company. Assuming business
returns to normal in coming years, investors will eventually focus
on the fact this insurer has earned, on average, roughly $3.50 a
share in the past seven years.
Titanium Metals (NYSE:
The major flaw behind following the moves of insiders: their timing
can be lousy.
this processor and producer of titanium on July 22, just as the
market rout began.
Chairman Harold Simmons had been aggressively accumulating
at about $17, below the then-noted price of $19 when my article was
published. Then, on Monday, Aug. 8, he bought another $8 million in
Titanium's stock for $13.65 a share.
for the purchase is likely found in better-than-expected
second-quarter results. Could demand for titanium eventually slump
in an economic slowdown? Surely, but the nearly 40% drop from the
52-week high appears to more than anticipate that.
This has not been a happy time for newly-public companies that are
trying to build a base of shareholders just as investors are
fleeing stocks. Alternative-energy firm Kior went public at $15 a
share in late June and held its own until the recent market rout.
Shares have fallen from about $14.50 at the start of August to
below $12 currently, a drop that has brought in some significant
insider-buying from a pair of investments firms. They each now own
more than 10% of the company (and are thus considered to be
beneficial owners -- or insiders).
Kior is taking a different approach to the alternative fuel
industry. Instead of producing liquids such as ethanol, which carry
unique properties and need to be transported through a separate set
of transmission pipelines, Kior is developing fuel that is
virtually identical to the crude oil ultimately refined into
gasoline, diesel and other distillates. "Their drop-in nature
provides them with immediate access to markets via the existing
global fuels infrastructure," note analysts at UBS.
The good news: a number of states have rising Renewables Portfolio
Standards (RPS), whichcall for steadily increasing use of these
kinds of renewable fuels. The bad news: Kior is several years away
from full-scale production and won't generate any profits until
then. A key near-term milestone involves the opening of a larger
plant in Columbus, Miss. in 2012.If the company can prove the
viability of its technology at this larger scale, then additional
investors are likely to find interest. UBS figures shares are worth
$28 on a discounted cash-flow basis, which is more than double the
current price. However, the market needs to stabilize and interest
in clean energy stocks needs to return before shares start to
Action to Take -->
As noted earlier, insiders have notoriously bad timing, so these
stocks can surely weaken some more before rebounding. But insiders
buy these types of stocks based on their promising long-term view,
and this should be your focus as well. In the long-run, you will
likely get a great deal on one or more of these stocks -- a dream
come true for deep value investors.
-- David Sterman
P.S. -- Few investors realize that a 20-year energy agreement
between the United States and Russia is about to expire. This deal
supplies 10% of America's electricity. As broke as our government
is, the situation is so serious that President Obama is asking for
$36 billion to avert this crisis. And Republicans support him.
Here's what's going on…
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.