Insiders at Cyclical Companies Still Bullish on the
Economy
By
Michael Brush
April 27, 2005
No matter how you slice it, anyone holding stocks has had a tough couple of
months. Since the start of March, the S&P 500 index is down 5% while Nasdaq
has shed 8%. As these indices flirt with lows for the year, we still haven’t
seen the high-volume blow off day that normally signals the worst is over.
So we may not even have seen the bottom yet.
But when all is said and done further down the road, we may look back at
this patch of weakness as a good opportunity to pick up the cyclical stocks
that are among those getting hammered the hardest right now.
Why?
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Investors are worried this economic cycle may have peaked. But there are too
many reasons to think that’s not really the case – assuming oil does not
resume its ascent to record levels. Here’s a look.
* The U.S. federal government is running spending deficits of over $400
billion – which is enormously simulative for the economy.
* Despite the Federal Reserve Board’s rate hiking campaign, real interest
rates are still low. Short-term rates are at 2.75% but inflation is at about
3%. So short-term interest rates are actually negative. Long-term rates are
at historically low levels of about 1.3% -- if you consider that the
ten-year bond yields 4.2% and inflation is at 3%.
* The U.S. dollar remains weak, which makes foreigners want to buy U.S.
goods even more.
* The money supply has grown dramatically over the past several years, and
this is usually linked to solid economic strength.
* As cyclical stocks – in areas like basic materials or the industrial
sector – get hit hard in the current scare, insiders are confidently
stepping up to buy. That’s positive for the economy. Here’s a quick look at
five examples in the small cap arena.
Flow International (FLOW)
is a tiny producer of high-pressure water jet systems used to slice and dice
everything from metal, stone, and glass, to food, paper and diapers. About
60% of water jet systems sold in the world are made by Flow. When shares
slipped to $5.80 from $6.80 in April, six different directors stepped up and
bought $845,000 worth of stock for $5.80 to $6.28. That wasn’t really much
of a pull back when you consider that shares of Flow are still up 100% from
where they traded in February, or $3. But with insiders buying so much,
we’ll take it as a buy signal for the stock.
Shares of Mercer International (MERCS),
which has pulp mills in Germany and Canada, have fallen to $8.50 from $10 in
early March and $11 at the start of the year. Clearly some investors are
worried that if the economy slows, manufacturers will need less paper for
packaging and shipping. Insiders at Mercer disagree. A beneficial owner
(which means he holds more than 10% of the stock) bought $1.1 million worth
of the stock at $8.50 in April, according to Thomson Financial. A director
and the chief executive bought $3 million worth at about the same level back
in February. That beneficial owner bought $12 million worth for around the
same price at the same time. For the past 11 months $8.50, or around where
the stock currently trades, has served as a solid support level. Raymond
James has six- to twelve-month price target of $9.50 on the stock, but
points out that at peak pulp pricing (not that we will get all the way
there) the stock could be worth $16 to $21. On the downside, this company
sells pulp mainly in Europe, where economic recovery has been weaker. The
good news is it does business with China, as well, where growth is much
stronger.
Shares of surface mining equipment producer Bucyrus International (BUCY)
have fallen to $38.20 from $45 in early March. During the worst of the sell
off, three directors picked up $344,000 worth of stock for $35.50 to $38.17.
Mining companies have under-invested in capital equipment for years. So
unless commodity prices really sink, these insiders are likely to end up on
the right side of this trade.
The trucker JB Hunt Transport Services (JBHT)
is hardly a micro-cap name. Its market cap is around $3 billion. But it
offers another example of a cyclical company where insiders were buying in
the April downdraft – so we’ll include it. As share slipped to $40 in April
from $50 in mid-March, two directors stepped up and bought $250,000 worth of
stock for $41 to $42. The company recently announced a stock split and a
$500 million share buy back plan for the next five years – two more signs
this stock may keep on truckin.
Tiny Iteris (ITI)
makes systems used on vehicles to warn drivers when they are drifting
out of their lanes. When the stock drifted below $2.50 in April from $3 to
$3.50 earlier this year, one director bought $190,000 worth in the $2.17 to
$2.40 range. While factors beyond the strength of the economic will play a
role in this stock’s future – like how many trucking fleets decide to adopt
the system – that insider buying serves as a signal that the stock will
likely be higher a year from now.
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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