Investing with bullish insiders

1/12/2009


The stock market has bounced nicely from Nov. 20 lows. Yet with many stocks still down sharply from previous highs, the itch to “bottom fish” is intensifying.

However, buying a stock merely because it has fallen sharply in price can yield lousy results — just ask the “smart-money” investors who bought financials only to see them crater. A better approach is to find beaten-down companies that combine high Quadrix® scores with other earmarks of quality turnaround stocks, such as buying by corporate insiders.

Interestingly, corporate exec-utives and directors appear bullish. According to Argus Vickers Weekly Insider, insiders have been buying at historically significant levels. Through Dec. 8, the number of insider purchases had outweighed the number of sales for 10 consecutive weeks. And six of the 10 weeks saw at least twice as many insider purchases as sales.

Given that insider selling usually swamps insider buying — since insiders often own large blocks of company stock and have many more reasons to sell than to buy — the trend of more buying than selling is especially noteworthy.

To be sure, it is not unusual for corporate insiders to be early in their buying. Still, given that investing in battered stocks is never easy, knowing you are investing alongside corporate insiders — arguably those most knowledgeable about company prospects — makes bargain-hunting more palatable and, hopefully, more profitable.

The table highlights Forecasts recommended stocks that have experienced insider buying over the last three months. Each stock earns a Quadrix Overall score in the top one-fourth of the more than 4,000 companies in our research universe.

The table contains several energy-related names. Energy stocks rode a roller-coaster in 2008, rising nicely in the first half of the year only to get crushed as oil prices plummeted in the second half.

With per-barrel oil prices now in the $40s — down from the July peak of around $145 — the consensus seems to be that energy demand will remain weak at least through 2009. Energy stocks have bounced sharply from lows reached Nov. 20. But equity investors appear to be viewing the recent bounce in oil prices — up more than 30% from the four-year low of $34 reached in late December — with skepticism. Energy stocks have not kept pace with crude oil prices over the past month, and the stocks remain very cheap relative to historical norms.

• Judging from their buying in recent months, corporate insiders expect higher stock prices for their respective energy stocks. Insiders have been especially bullish at National Oilwell Varco ($30; NOV), buying 19,000 shares of the oilfield-services stock over the last three months. Insiders have also been active in oilfield-services stocks Schlumberger ($48; SLB) and Transocean ($57; RIG). National Oilwell is rated Buy and Long-Term Buy. Transocean is a Focus List Buy and a Long-Term Buy. Schlumberger is a Long-Term Buy.

• Insiders at NII Holdings ($24; NIHD) have also been in a buying mood, snatching up more than 61,000 shares of the wireless telecom provider in the last three months. The stock is up 90% from its Nov. 20 low of $12.38 but still down 59% from its 52-week high of more than $57.

Most of the insider buying occurred at prices in the mid-to-upper teens, including more than 47,000 shares purchased in December at $17.25 to $18.42. NII, trading at less than 10 times the consensus 2009 earnings estimate of $2.51 per share, is a Focus List Buy.

INSIDER BUY FAVORITES
Quadrix
Scores *
Company (Price; Ticker)
Div
($)
Yield
(%)
52-Week
Price Range
Value
Overall
Share
Purchased
($)
Industry
Advice
Aflac ($46; AFL)
1.12
2.5
69
-
30
52
75
9,072
Life & Health
Insurance
Long-Term Buy
Airgas ($40; ARG)
0.64
1.6
65
-
27
62
80
1,000
Industrial Gases
Focus Buy
General Dynamics
($61; GD)
1.40
2.3
95
-
48
73
92
17,000
Aerospace &
Defense
Buy †
Johnson & Johnson
($60; JNJ)
1.84
3.1
73
-
52
37
77
4,000
Pharmaceuticals
Focus Buy †
National Oilwell
($30; NOV)
0.00
0.0
93
-
18
94
96
19,000
Oil & Gas
Equip. & Svcs.
Buy †
NII Holdings
($24; NIHD)
0.00
0.0
57
-
12
92
91
61,385
Wireless Telecom
Focus Buy 
Schlumberger
($48; SLB)
0.84
1.8
112
-
37
61
81
1,000
Oil & Gas
Equip. & Svcs.
Long-Term Buy
Transocean
($57; RIG)
0.00
0.0
163
-
42
89
95
4,500
Oil & Gas
Drilling
Focus Buy †
* Quadrix scores are percentile ranks, with 100 the best.   † Also qualifies as a Long-Term Buy.

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