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Insiders Bucking the Trend Again
By Michael Brush
Exclusively for InvestorIdeas.com
February 28, 2008
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Once again this past week insiders were placing bets on beaten-down cyclical names – the kind that aren’t supposed to do well because the economy is meant to weaken further.
These insiders aren’t making an overall call on the economy per se. They just think their own businesses will do better than the market is giving them credit for. These are classic contrarian bets. We did well with cyclical names picked up by insiders in last week’s column so I say we stick with this theme.
Plus this week’s round of buying in cyclical names has two added bonuses:
- In several cases the insiders have exceptional records.
- Many of the companies have huge cash positions which offer a good margin of safety in these uncertain times.
Here’s a look!
Netgear (NTGR)
If you have ever set up a home computer networking system, chances are you’ve used equipment from Netgear. Despite the popularity of its products, Netgear’s stock gapped down in the middle of February to the low $20 range after it posted weak fourth-quarter results. It also guided down for the first quarter. The stock is down from $35 since the start of the year.
In the sell off, director Lacy Linwood picked up over $1 million worth of stock for about $21.80. There are a couple of noteworthy things about the insider activity here. First, Linwood has a great record. This stock has gone up 67% on average after he’s bought it, according to Thomson Financial. Second, insiders – though not Linwood – were big sellers above $30 before the big slide. They seem fairly astute, as a group, adding weight to Linwood’s purchase.
I also like this stock because the company has $5 a share in cash. This provides a good margin of safety and suggests the company has enough money to survive and fund development without doing a dilutive financing. Even before you strip out this cash, the stock looks cheap – trading for one times sales and price earnings to growth (PEG) ratio of .68. Lehman Brothers analyst (LEH) Inder Singh has a price target to $37 on the stock.
MGM Mirage (MGM)
Speaking of good records, it’s easy to be wowed by two recent buyers at the casino company MGM Mirage. On average, whenever Melvin Wolzinger buys the stock goes up over 100% in the following six months, according to Thomson Financial. In the huge sell off in MGM Mirage to $66 from $100 last October, he recently bought $131,000 worth for around $65-$66.
His fellow director Ronald Popeil has a good knack for knowing when to pace bets on this stock, too. It typically goes up 35% in the six months following his purchases. He recently made a convincing bet of $665,000 at prices of about $64-$67. These buys tell me you’ll stand a better chance of making money buying this stock here than you would placing bets at MGM’s tables. Your broker probably doesn’t offer free drinks, though.
Three small cap tech names
I also spotted interesting buying in another three tech names in the past week. The tech stocks that insiders bought last week have done well, at least so far.
- Intevac (IVAC) makes equipment used to manufacture hard drives. It also has an imaging division that makes electro-optical sensors and cameras. Its stock has drifted down to $13 from above $29 in the past year. But it looks like it’s in a convincing up trend since the middle of January. Insiders seem to think so. A director and a line officer recently purchased $250,000 worth of this tiny company that has a $133 million market cap after stripping out cash. The company can boast an impressive $6 a share in cash, and minimal debt.
- MoSys (MOSY) is another small chip-related company where insiders are buying. Three insiders including the chief executive bought $350,000 worth of stock recently. The company, which sells technology used in chips, has a market cap of just $76 million once you take out the $2 a share in cash.
- Equinix (EQIX), a networking company, has fallen 30% to trade around $70 a share, just since the start of the year. At least one director, Scott Kreins, thinks the stock has fallen too far. He purchased nearly $4 million worth of the stock recently at around $70 a share. Another director bought $358,000 worth. The company has $10 a share in cash, but it also has significant debt.
Janus Capital (JNS)
Publicly-traded mutual fund companies have fared poorly in this sell off. Janus Capital has fallen to $26 a share from $36 only three months ago. At around these levels, Janus Capital’s chief executive Gary Black thinks his company’s shares are a good buy. He recently put over $1.2 million into the stock at around $24.50. There’s been nothing but selling by insiders at Janus in the past year – so this is an interesting trend reversal.
Legacy Vulcan (VMC)
Finally, no round of contrarian insider buying in cyclical names would be complete without some purchases of a building-related stock. We got that recently at Legacy Vulcan, which produces crushed stone, sand, gravel and asphalt used in building. A director purchased $671,000 worth of stock recently just above $67 a share. The stock has fallen from $120 a year ago.
Back at it
We also saw more buying into strength this past week at Sally Beauty Holdings (SBH) and Columbia Sportswear (COLM), two cyclical names I featured last week. And the Baker brothers – two biotech wizards judging by their record -- were purchasing more Allos Therapeutics (ALTH) in its recent earnings-related weakness.
The bottom line: If we are near the bottom in this current market sell off, cyclical names like these favored by insiders are the way to go.
Disclaimer
At the time of publication, Michael Brush owned shares of Allos Therapeutics 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/. www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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