Are Insiders Right Or Wrong On Coldwater, Morgans?

by: Brian Gorban

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, which means looking for stocks trading at a discount to their peers in terms of book value, earnings, sales, free cash flow, and/or other valuation metrics.

Unfortunately, the market is often 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.

Coldwater Creek (NASDAQ:CWTR) is a multi-channel specialty retailer of woman's apparel and accessories through their e-commerce website, phone, mail, and catalogs. Unfortunately, the company has been struggling with falling sales and lower margin,s leading the stock now down more than 75% from its 52-week high. Seems that AnnTaylor (NYSE:ANN), achieving over 15% year-over-year revenue growth, and Chico's FAS (NYSE:CHS), with over 18% year-over-year revenue growth, are stealing market share from Coldwater.

However, the selling looks to be overdone regarding Coldwater, at least according to co-founder, CEO and Chairman Dennis Pence, who has been purchasing stocks aggressively since September 6. He started with a nice 171,348 share buy on the open market at $.89/share on September 6, and since that time has continued accumulating more than a million shares at prices as high as $1.50/share. The stock looks reasonably cheap selling at 0.15x price/sales and 0.9x price/book with little debt. However, the company lost over $100 million this past year and has negative returns on equity in excess of 50%. I don't see any immediate reason to buy this stock, as the valuations are not too great, but if it were to come back down to 0.75x price/book, translating to a $1.10 share price, I'd be a buyer. No opinion on Ann Taylor or Chico's.

Morgans Hotel Group (NASDAQ:MHGC) engages primarily in the ownership and operation of boutique hotels in the United States and Europe. The company's performance hasn't been good of late, losing almost $100 million in net income this past year and revenues declining almost 10% year-over-year. This is in sharp contrast to their much larger competitors Marriott (NYSE:MAR), netting almost $500 million in net income with over 7% year-over-year revenue growth; Starwood (HOT), netting almost $400 million on over 10% year-over-year revenue growth; Wyndham (NYSE:WYN), netting more than $400 million on over 13% year-over-year revenue growth; and Hyatt (NYSE:H), netting almost $100 million on over 5% year-over-year revenue growth.

However, Executive Chairman David Hamamoto bough a sizable 75,000 shares on September 9 at $5.86, and another 50,000 shares on September 12 at $5.85, along with another 4,600-share purchase on September 13 at $5.98. Moreover, billionaire Ronald Burkle, from August 24 to 26, bought collectively more than 1.3 million shares on the open market at an average price of approximately $6.15. Clearly these two insiders see some value, but I don't see it -- the company has a negative book value with a large amount of debt and stiff competition from these aforementioned competitors.

I can't give this a buy for now. I would rather own Wyndham from the bunch, as it trades under 14x price/earnings, boasts a respectable 1.8% dividend yield that management has been great at raising, and over 50% gross margins, which far exceed these other competitors, meaning Wyndham has pricing power going forward. I think Wyndham is a solid buy here at $32.50.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WYN over the next 72 hours.