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Insiders Aren’t Nuts, They Just Look That Way
By Michael Brush
Exclusively for InvestorIdeas.com
February 21, 2008
Some of the most remarkable insider buying in the past week was going on in precisely the sectors that should do the worst if we really are headed for economic disaster. I mean the highly cyclical retailing, tech and auto sectors. By “cyclical,” market analysts mean companies whose fortunes are tightly tuned to the vagaries of the economy.
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Since the prevailing wisdom now is that we are in for a prolonged downturn that could be worse than you can even imagine, either insiders are nuts or they sense something many market analysts are missing.
History shows they generally aren’t nuts – but quite capable of spotting bargains that turn out to be good buys in the long run. Since they have this kind of record, I’d go with them this time as well, despite all the signs that we may be in for a prolonged rough patch in the economy and stock market. Their buying in cyclical names could be a sign that the market may soon be reaching a bottom. Just keep in mind that insiders as a rule tend to be early.
Retail
Last week we learned that the University of Michigan consumer sentiment report dropped nine points to 69.6 in February. That was the lowest reading in 16 years. This week, the Fed revealed that it recently cut its economic forecast, predicting gross domestic product will grow 1.3%-2% this year, down from prior forecasts of 1.8%-2.5% growth. The Fed also upped its forecasts for joblessness.
In short, this seems like the worst time to be buying retail stocks. But insiders, who know their business better than Fed economists, disagree.
At Columbia Sportswear (COLM), chief Timothy Boyle bought $490,000 worth of stock for around $42 a share last week. Earlier this month another insider, Michael McCormick, got an even better deal when he plowed $101,000 into the stock, paying $40.73 per share.
Columbia Sportswear stock looks like it may now be in an uptrend, after getting cut in half in the past seven months to fall as low as $35, earlier this year. With a price earnings ratio of around 11 on trailing 12-month profits, Columbia Sportswear trades about as low as it has for the past five years. It is well below the industry trailing p/e of 17.6, according to Reuters.
Columbia Sportswear has rising inventories and Boyle himself recently warned the first quarter will be weak. He just thinks the market reaction is overdone, at least judging by his buying.
Insiders are also big buyers at Sally Beauty (SBH) a distributor and retailer of professional beauty supplies. They bought $700,000 worth of their stock in February in a sharp pullback to the low $7 range, from nearly $11 earlier this year. Three times in the past six months this volatile stock has successfully tested the low $7 range, another sign this might be a “safe” place to buy.
Tech
Tech bellwether Hewlett-Packard (HPQ) jumped 8% Wednesday after beating expectations and guiding higher. Personal computer sales were up 27% over last year. But ominously, revenue growth actually slowed to 7%, compared to 9% last year. This could be a reflection of the pullback in corporate spending on tech which everyone expects, a forecast that contributes to a gloomy outlook among investors for tech.
At many companies, however, insiders are downright enthusiastic.
Let’s go down my list of what I think are some of the most compelling purchases recently in tech.
- Insiders at Micrel (MCRL) bought $100,000 worth of stock this week, after purchasing $1.3 million for $5.70 to $6.50 since January 25. The chip maker has a decent margin of safety in $1.40 a share in cash. It has no debt.
- I also like the buying last week at another chip maker, ON Semiconductor (ONNN), where one insider picked up $590,000 at $5.89 a share. The week before, another insider bought $495,000 worth of stock a little higher. What’s intriguing about this activity is that insiders (though not the same ones) were heavy sellers last fall at nearly double these prices. In short, insiders here seem particularly astute at timing their stock.
- In the sharp sell off at CPI International (CPII), which has been cut in half since October, insiders just purchased about $650,000 for around $11.20 range. That’s a powerful signal at a tiny company like this one, which provides microwave and radio frequency components used in the defense, communications and medical sectors.
- Insiders at chip maker Cirrus Logic (CRUS) earlier this month bought $780,000 worth of stock in the $4.71 to $5 range. Again, that’s a sizeable amount for such a small company, which has a market cap of just $211 million when you strip out cash of $2.60 a share. As with Micrel, that cash level provides a margin of assurance that Cirrus can make it through hard economic times without cutting back on the essentials needed to be positioned correctly for a rebound.
Auto parts
General Motors (GM) recently reported that it lost $1.5 billion before taxes in North America last year, continuing a string of heavy annual losses. That doesn’t suggest it’s a great time to invest in anything related to the auto sector.
But insiders at Autoliv (ALV), which sells safety components like airbags and seatbelt systems, disagree. Two insiders recently bought $280,000 worth of stock. This is an admittedly weaker signal than the ones above because Autoliv is a $3.8 billion market cap company with an enterprise value of $5 billion when you add in debt. Still, it’s an interesting contrarian insider play in line with the ones above in that it goes against the current conventional thinking.
The bottom line: You can’t say it too often: Insiders tend to be early. So while they’re not calling a bottom in the market right here with these purchases, they may be showing you the way to positions the will turn nicely profitable – as long as you can survive the volatility in the meantime.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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