By David Sterman
In stressful times like these, it's important to distinguish between investors' appetite for stocks in general and the actual outlook of each company. The market plunge is related to top-down concerns about the U.S. economy, but a bottom-up approach is still warranted. This is because -- despite the weak stock market performance -- a company can do well even if its industry isn't doing that well. In some cases, even though a business is doing OK, the stock price is signaling distress and hitting all-time lows.
This is when officers, directors and major shareholders (collectively known as insiders) usually act. They have the best view of the company's stock fundamentals, so they gauge the company's health by the day. So when a choppy market pushes the stock down below any sort of fair value, these insiders can respond with their checkbooks. In fact, there's been a massive wave of insider-buying since the market hit the skids on July 22. To cover all of the names would take quite some time. But this should send a clear signal that there is value to be had in this market.
To focus investors' sights, I've limited the view to companies with at least $400,000 in recent insider-buying. I've also tossed out stocks that have rebounded as a result of this buying pressure. All of the stocks in the table below trade for less than what insiders have paid for them. But don't let that dishearten you. Insiders often have a long-term view and are prepared to wait out any short-term gyrations. Click to enlarge
The book-value buyers
Financial stocks can often be found on insider-buying lists during tough times because insiders know tangible book value is a floor that is rarely breached. When a company's market value falls below this level, a solid buying opportunity emerges. Morgan Stanley (NYSE: MS), for example, is now valued at about $36 billion, well below the $47 million in tangible book value found on its balance sheet. This roused the interest of a range of company directors on the week of Aug. 1, as they bought nearly $4 million in stock when it hit a two-year low price of $19.28.
In a similar vein, shares of Cincinnati Financial (Nasdaq: CINF) proved too tempting to insiders. Bad weather this year has led to a spike in property claims for this Midwest insurer. As a result, profits have been slumping despite a sharp rebound expected for 2012. But it's the base of assets on which insiders are focusing. Cincinnati Financial has more than $11.75 billion of investments in reserve in case of a rainy day and roughly $5 billion in tangible stockholder's equity. This base of equity is more than 25% above the current market value for the entire company. Assuming business returns to normal in coming years, investors will eventually focus on the fact this insurer has earned, on average, roughly $3.50 a share in the past seven years.
Titanium Metals (NYSE: TIE)
The major flaw behind following the moves of insiders: their timing can be lousy. I profiled this processor and producer of titanium on July 22, just as the market rout began.
Chairman Harold Simmons had been aggressively accumulating shares at about $17, below the then-noted price of $19 when my article was published. Then, on Monday, Aug. 8, he bought another $8 million in Titanium's stock for $13.65 a share.
A key catalyst for the purchase is likely found in better-than-expected second-quarter results. Could demand for titanium eventually slump in an economic slowdown? Surely, but the nearly 40% drop from the 52-week high appears to more than anticipate that.
Kior (Nasdaq: KIOR)
This has not been a happy time for newly-public companies that are trying to build a base of shareholders just as investors are fleeing stocks. Alternative-energy firm Kior went public at $15 a share in late June and held its own until the recent market rout. Shares have fallen from about $14.50 at the start of August to below $12 currently, a drop that has brought in some significant insider-buying from a pair of investments firms. They each now own more than 10% of the company (and are thus considered to be beneficial owners -- or insiders).
Kior is taking a different approach to the alternative fuel industry. Instead of producing liquids such as ethanol, which carry unique properties and need to be transported through a separate set of transmission pipelines, Kior is developing fuel that is virtually identical to the crude oil ultimately refined into gasoline, diesel and other distillates. "Their drop-in nature provides them with immediate access to markets via the existing global fuels infrastructure," note analysts at UBS.
The good news: a number of states have rising Renewables Portfolio Standards (RPS), which call for steadily increasing use of these kinds of renewable fuels. The bad news: Kior is several years away from full-scale production and won't generate any profits until then. A key near-term milestone involves the opening of a larger plant in Columbus, Miss. in 2012. If the company can prove the viability of its technology at this larger scale, then additional investors are likely to find interest. UBS figures that shares are worth $28 on a discounted cash-flow basis, which is more than double the current price. However, the market needs to stabilize and interest in clean energy stocks needs to return before shares start to rebound.
As noted earlier, insiders have notoriously bad timing, so these stocks can surely weaken some more before rebounding. But insiders buy these types of stocks based on their promising long-term view, and this should be your focus as well. In the long-run, you will likely get a great deal on one or more of these stocks -- a dream come true for deep value investors.