There are many factors I screen for prior to making a stock purchase. I'm a strong advocate of the time-tested strategy of valuing investing. That means looking for stocks trading at a discount to its peers in terms of book value, earnings, sales, free cash flow, and/or other valuation metrics. Unfortunately, the market a lot of times is rather efficient and makes it hard for us to find securities that meet this strict test. However, I've found over my close to fifteen years of investing, that insider buying from well-known investors and strong management teams is a great starting ground to screen for the next potential winners.
1. Ecolab (NYSE:ECL) is the global leader in cleaning, sanitizing, food safety, and infection control products and services with almost $6.5 billion in global sales. None other than Bill Gates, co-founder of Microsoft and one of the richest men in the world the last two decades, has been acquiring this stock at a feverish pace. It was reported on August 23, that he and his namesake foundation owned over 23 million shares or approximately 10% of the total shares outstanding. Over just the last week he has acquired an additional 7 million shares, bringing the total of both entities to approximately 30 million, and likely more acquisitions in the near future as he has the deep pockets to make that happen.
Looking at the fundamentals, the management team looks strong as demonstrated by the very nice 25% return on equity, almost 11% return on assets, and among the top of its competitors regarding operating and profit margins. Moreover, the company has been excellent at giving back to shareholders through consistent dividend raises. However, it has quite a bit of debt, over a 5x price/book, and a rather small 1.3% dividend yield. I don't like it at these levels, but I think this high quality stock is safe at the $46 range when the dividend yield moves up to 1.5% area, and has been showing strong support by most likely none other than Mr. Gates.
2. Ladenburg Thalmann (NYSEMKT:LTS) continues to show very strong insider support as its CEO and largest shareholder continues to add to his already large holdings. The company's recent acquisition of Securities America looks to be very accretive and hence the optimism. At its current share price of $1.58, it still may be cheap in the long-run, but I'm not in a rush to buy so I'd look to pick up shares in this volatile stock if it hits 1x price/sales translating to $1.20/share. If it explodes higher, I'm perfectly fine foregoing profits for the sake of protecting capital.
3. Chimera Investment (NYSE:CIM) had some considerable insider buying for the month of August, with almost 250,000 shares purchased at levels considerably higher than it is today. I've written in a previous article how I believe this is a cheap stock trading at .85x price/book of its most recent quarter, under 5x price/earnings, and most tempting, its steady 18%+ dividend yield. I think this is a buy at $2.85/share.
4. Invesco Mortgage (NYSE:IVR) had collectively over 30,000 shares bought on the open market in the month of August by various insiders-- which is always a positive. Moreover, the valuations look nice how it's trading at .85x price/book, just over 4x price/earnings, and until this last reported quarter an almost 25% dividend yield. However, as is usually the case when a dividend yield gets too abnormally large, there's a reason. On September 8 we learned that Invesco cut its dividend a rather large 17.5%, to a $3.20 annual dividend. If it's able to maintain that, the company still sports a nearly 20% dividend yield, but I have to wait until the company's late October conference call, as I need more clarity before initiating a buy. Moreover, Chimera has much of the same metrics and a more experienced management team, so I see no reason not to just get a great dividend REIT through the company as this uncertainty is worked through.
5. Air Transport Services Group (NASDAQ:ATSG) has had some impressive insider buying, most notably by the managing partner of Red Mountain Capital Partners Willem Mesdag, collectively purchasing almost 1.2 million shares just since August 25 on the open market. According to Red Mountain's last SEC filing, it was the largest holder of Air Transport, owning over 13%. The valuation metrics look good as the stock trades right near 1x price/book, under an 8.5x price/earnings, and under .5x price/sales. I think this stock is just being hammered along with the general market slide for no good reason as the company operationally has still been performing relatively well. This is a buy under $5/share, and as an interesting side note, this is a holding of a value investor I greatly admire-- Mohnish Pabrai-- and whose namesake hedge fund has performed among the top 5% of all hedge funds in the last ten years.
6. Lions Gate Entertainment (NYSE:LGF) has been in the news in the last year as billionaire shareholder activist Carl Icahn has tried a few times to take it over. He finally threw in the towel at the end of August, selling half his 22 million shares at $7/share back to the company and the other half now to the new largest shareholder, Dr. Mark Rachesky, at the same price. The company's valuation metrics look compelling trading at just 3.5x price/free-cash-flow and just over .6x price/sales. I think with the company fully focused now on its business operations, both the company and largest shareholder finding great value at $7/share, it's a buy here at $6.86/share.
7. Leap Wireless (LEAP) got absolutely hammered in early August when it reported disappointing earnings. After the nearly 60% drop, it has recovered some-- thanks in part to Dr. Rachesky, who purchased over 8 million shares since that time giving him close to 14% ownership of the company. The valuation metrics look nice as it trades below .9x price/book and less than .25x price/sales, considerably less than the company's direct competitors, Sprint (NYSE:S) and MetroPCS (PCS) who also reported lousy quarters. However, I have to shy away from this company as it's simply bleeding too much cash, and with over $3 billion in debt, does not have much room for error. I'd rather own AT&T (NYSE:T) or Verizon (NYSE:VZ) if I want to invest in the cell phone space and receive their approximate 6% dividend yields.
Disclosure: I am long CIM.