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5 Below-Book Stocks with Major Insider Buying

Posted
12/3/2012 11:00:00 AM
By: StreetAuthority
Referenced Stocks:C;CHK;CYS;NLY;WMC

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.

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.

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.

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.

4. Chesapeake Energy
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.

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.

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.