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By Michael Brush
Exclusively for InvestorIdeas.com
May 25, 2006

Is the stock market having convulsions because of concerns about too much inflation -- which would spark more central bank interest rate hikes that would slow growth? Or is the weakness telling us an outright slowdown in the economy is already here? Is this just a pause that’s a good entry point, or the end of the 2003-2006 bull market?

Those are all good questions, and no one really knows the answers. But insiders are telling us this is just a bump in the road. The sharp stock market pullback since May 11 has brought a lot of insider buying in economically sensitive areas like basic materials, financials, trucking, energy and retail.

These are all areas that tend to outperform when the economy is healthy. So insiders seem to be saying the bull run from 2003 is not over yet.

The last time we let insiders guide us during a bout of market mayhem back in October (http://www.investorideas.com/insiderscorner/Articles/Insider_Prices.asp), all but one of the picks advanced 20% to 60% inside a few months. The other one was up 10%. Two from that group have since fallen below the October levels.

With the proviso that past performance offers no guarantee of future success, here are five names in economically sensitive areas where insiders have stepped up their buying during the May madness. If you believe the economy is still in good shape, you’ll want to own these names. If the market is still weak next week, we’ll take a look at five more that also fit the bill.

Retail

Deckers Outdoor (DECK) sells a broad range of footwear from slippers to hiking boots, including the wooly Ugg boots that were all the rage a few winters ago and the popular Teva sandals that come out of the closet during the summer months.

In the market weakness since May 11, Deckers Outdoor has fallen to $35.35 from $44.75. Down here, the stock looks cheap, with a forward price earnings ratio of 13.5. That valuation is even lower when you consider that the company has $5 a share in cash.

Insiders see value here, as well, and their buying is signal that’s telling the bears to take a hike. Since the stock got pummeled insiders including the chief executive and the finance chief have purchased $320,000 worth of stock for prices between $36 and $37, according to Thomson Financial.

Trucking

As a company that offers trucks and freight handling services, USA Truck’s (USAK) fortunes are directly linked to the strength of the economy. Since around May 11, this company’s stock has fallen to $18.50 from above $23. At these levels, chairman and chief executive Robert Powell says enough is enough. He purchased $47,000 worth at $18.73 on May 18, suggesting the bottom is near for this stock.

Basic materials

Companies that make chemicals and paper products aren’t the most interesting businesses to read about. But they tend to be highly leveraged --which means earnings can really take off when the economy is strong and sales growth is solid. Insider buying patterns tell me that should be the case at the following three companies.

A. Schulman (SHLM) is an international supplier of high-performance plastic compounds and resins. The two largest segments the company serves are packaging and car making. These two end markets account for about 55% of sales. They tend to be fairly sensitive to economic trends -- especially packaging, which accounts for 37% of sales.

A. Schulman’s board recently approved a new stock buyback plan. And the company does a lot of business in Europe, so the weakening dollar will help (http://moneycentral.msn.com/content/P39069.asp). The company, whose stock recently sold for about $24, has $2.60 per share in cash and a price to sales ratio of just .51. The stock has been trapped in a trading range of $23 to $25 all year. But the recent, big insider buying suggests the break out will be to the upside.

GenTek (GETI) makes and sells chemicals and industrial components like wiring products, bearings and rocker arms used in the automotive, appliance, electronics and construction industries. The company’s stock has fallen to around $25.30 from $28.89 in the recent market pullback. Down here, the stock looks cheap, with a price to sales ratio of .28. Since May 12 insiders with good buying records -- including the chief executive -- have purchased $236,000 worth of stock for $24.50 to $27.

Caraustar Industries (CSAR) makes recycled and converted paperboard products. Since around May 11, its stock has slipped $1 to $9. Down here, the stock has a paper-thin price to sales ratio of .29. It traded above $11 earlier this year.

One cloud is that this company carries a huge debt load of $557 million, compared to a market cap of $260 million, following a series of acquisitions. Now the company is restructuring by selling off divisions to help reduce debt and focus on its core businesses. Despite all the debt, the stock looks attractive at these levels because it trades below its cash per share level of $10.

The bottom line: These are scary times in the stock market but insiders are sending a signal that the weakness will only be a temporary pause – and that underlying solid economic trends are still in place. Back in October, the last time the markets sold off sharply, insider buying led us to the right choices. As troubling as the market weakness is now, I’m betting they will do the same thing this time, too.

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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