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Profit From Market Gloom by Getting Insider Prices
By
Michael Brush
October 13, 2005
One of the great things about a gloomy market like the one we are in now is
that you get a rare opportunity to buy small-cap stocks at prices enjoyed by
insiders. Or better yet, you can buy lower.
Normally, you don’t get that chance. With small-cap insider buy stocks, so
many traders pounce on the insider signal that these stocks shoot up
literally the second a significant buy hits the tape.
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Then the stocks may never look back – unless a sour mood grips the market as
it does now.
This lousy market has brought two great little potential winners back down
to where insiders recently bought a lot of shares. I’d buy both stocks here,
as a result.
They are: Jacuzzi Brands (JJZ)
and Smith & Wesson (SWB),
the gun maker.
Jacuzzi
Insiders snapped up lots of shares of Jacuzzi in late September at $7.30 to
$7.45. That immediately sent the shares above $8.20. Since then, a weak
market has shaken out the traders, pushing the stock down near $7.40 again.
The maker of the famous hot tub, Jacuzzi actually gets most of its revenue
and growth by selling more mundane plumbing products in its Zurn division.
Zurn sales are growing 12% a year, in part because of the strong housing
market, but also because it is taking market share. The Jacuzzi bath
products business is actually the company’s weak spot.
Jacuzzi shares are down sharply from $11 last summer – where they hovered on
take out speculation. Since then, worries that a deal would slip have hurt
the stock. But some kind of strategic buyout is probably still in the works,
and the stock looks cheap at these levels with a price to sales ratio of
.43.
These factors might explain the recent insider buying. They also explain why
Jefferies analyst Robert Schenosky has an $11 price target on this stock.
“The target is not based on our EPS estimates, but rather our view that the
company is likely to be sold in the next 12 months and most likely in two
parts—Zurn and the bath business,” says Schenosky.
Smith & Wesson
The manufacturer of the Magnum pistol once brandished by Clint Eastwood to
menace the bad guys, Smith & Wesson aims to increase its share of the hand
gun market in the U.S. and abroad. It wants to land more military and law
enforcement contracts, and sell more guns in the consumer market for use in
sport.
To do so, the company has hired managers who once worked at other leading
gun makers like Glock and Beretta. It has hired a lobbyist in Washington
D.C. and a product placement firm, and the company even sponsors a NASCAR
racing team. Smith & Wesson also boasts managers from major consumer
products companies like Harley Davidson (HDI),
Black & Decker (BDK)
and Coca-Cola (KO).
The company may also launch a “long-gun” division that will sell rifles and
shotguns, and diversify into the “less-than-lethal” weapons like pepper
spray and stun guns.
Smith & Wesson insiders recently bought a lot of shares for prices between
$4.60 and $4.80. That sent the stock up above $5.50 but the market gloom
recently helped push the stock as low as $4.50 again. If insiders recently
liked it in the $4.60 to $4.80 range, you should, too.
Other sales
Several other stocks we’ve featured in this column are now back down near
levels where insiders recently bought, making them attractive buys once
again.
They include: Fleetwood Enterprises (FLE)
which makes trailer homes, Chesapeake Energy (CHK)
and Warren Resources (WRES)
which are two energy names, the chip maker Sigma Designs (SIGM),
and Lions Gate Entertainment (LGF),
a movie company.
For descriptions of these companies, scan the headlines at this link
http://www.investorideas.com/insiderscorner/ and look for the tickers.
Will they really come back?
The key to buying a pullback in the market, of course, is that you need to
have some reason to believe the markets will turn around. I don’t know if
this week will be the bottom or whether the current bout of market weakness
will stretch on before an eventual turnaround.
But overall, I’d say we may see a low soon – if we haven’t already –
followed by persistent strength. The reason: Investors are worried about
things that probably won’t matter.
First, a lot of investors are concerned about inflation – which could make
the Federal Reserve Board slam on the brakes and kill the economy. Yes,
inflation is back. And the Fed has been hiking rates a lot. But short-term
interest rates – the ones the Fed controls -- are still only at 3.75%
That’s a level normally associated with the depths of a recession when if
fact we are still in a fairly healthy economic boom. The bottom line: The
Fed could keep raising rates for a long time before we get to the point were
interest rates are high enough to kill healthy economic growth.
Second, many people are worried that high heating fuel costs this winter –
and high energy prices overall – will hurt the consumer. They are also
concerned about a slowdown in refinancing, as interest rates increase. I
doubt any of these will do serious damage to the consumer.
For one thing, unemployment is down near 5% -- one of the lowest levels in a
long time. Next, real wages are increasing by 6% year over year, the best
growth in thirty years. Refinancing is down, but it is still at relatively
high levels, historically.
And even though energy prices are up, energy still only takes about 5% to 6%
of our disposable income. That is not a lot. True, many consumers are
suffering. But overall, consumers still have a lot of firepower thanks to
high employment levels and healthy wage growth.
Finally, the number of bears in the market is now up sharply compared to
July and August. More depressives could join their ranks before all is said
and done, but this shift in sentiment to a widespread bearish view is often
a great contrarian signal that it is time to buy stocks.
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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