Insider buying is almost always a good sign. We’ll look at five companies that have experienced insider buying over the last few months and see if any of them present good opportunities for value investors.
Kraton Performance Polymers, Inc (KRA)
In August, a four-cent earnings miss sent shares of high-performance polymer-maker Kraton off a cliff. This decline however has triggered a string of insider buying from a 10% owner, GMT Capital Corp, and Director John Gallagher. Still, the share price has edged downward. Shares currently trade for only 4.8 times forward earnings. The company pays no dividends, yet shares are extremely cheap compared to other chemical companies, such as Air Products & Chemicals (APD), DuPont (DD), and Dow Chemical Co. (DOW). These companies trade for 12.5, 10.5 and 8.8 times forward earnings, respectively.
Interestingly, Kraton has a higher return on assets than all three of these companies. While the Kraton doesn’t have the earnings history of the three aforementioned companies, Kraton is by no means new. Kraton Polymer began as a government operation during WWII. Soon after, Shell Chemical Company absorbed Kraton, where it was a component until 2003 when Shell started shedding non-core businesses. Since going public in December 2009, earnings and share prices have been erratic. However, Kraton is by no means a volatile start-up. The company has over 50 years experience innovating and operating. At 4.8 times forward earnings, this company is an outstanding buy. Value investors should definitely look closer at Kraton.
Valeant Pharmaceuticals International, Inc. (VRX)
Since August, specialty pharmaceutical maker Valeant has seen strong insider buying in the face of falling share prices. This buying is coming from the CEO, the President, the Executive Vice President, and a host of directors. Shares peaked in July at $57.24. Now trading for about $35, the company still trades for 13.3 times forward earnings. After a big loss in the third quarter of 2010, Valeant earnings have hovered just above breakeven.
Analyst estimates are optimistic about the future. However, the track record doesn’t look great. Consider looking at more profitable pharmaceuticals that trade for similar multiples, like Teva Pharmaceutical (TEVA), Novartis (NVS), or Hospira Inc (HSP).
Clear Channel Outdoor Holdings (CCO)
Strong insider buying has been taking place for Clear Channel Outdoor since August. All of this insider buying is coming from Clear Channel Media. The buying began after a second quarter earnings report that beat estimates. This earnings report temporarily slowed the decline in share price, however since September, share prices have resumed their decline. Earnings have been volatile for Clear Channel for a while now, however shares are currently trading over 40 times forward earnings.
Competitor Lamar Advertising (LAMR) is struggling to retain profitability as well. Yet the marketing services industry isn’t all bad: Valassia Communications (VCI) and National Cinemedia (NCMI) look more stable. Despite the insider buying, value investors should avoid Clear Channel Outdoor due to its unpredictable earnings.
Tesoro Corporation (TSO)
Since August, Directors have been buying more shares of independent refiner Tesoro. Despite a recent rebound of the share price, Tesoro shares still trade for only 5.0 times forward earnings. This is in line with others in the industry. Competitors HollyFrontier Corp. (HFC), Marathon Oil Corp. (MRO), and Valero Energy (VLO) trade for 5.3, 5.5, and 4.7 times forward earnings, respectively.
Companies in this industry operate with small margins and are susceptible to volatile earnings should oil demand change. However, these companies can be very profitable if they manage supply and demand correctly. Any company that can grow earnings is a great deal at five times forward earnings. Companies in the refining industry are being held back be the uncertainty of the economy, as that relates to uncertainty in the petroleum demand. For value investors bullish on the economy, Tesoro and the other refiners present great value opportunities.
Bank of Commerce Holdings (BOCH)
Bank of Commerce Holdings has been experiencing heavy insider buying from directors and officers since August. The company’s earnings have come in slightly below estimates over the last three quarters, and expectedly the share price has been punished. Shares currently trade for 10.9 times forward earnings, which is cheaper than other west coast regional banks City National Corp. (CYN), SVB Financial Group (SIVB) and Zions Bancorp (ZION). Bank of Commerce Holdings also offers a great 3.6% dividend yield and pays out nearly 39% earnings. The company has very high capital adequacy ratios, 15.8% for Tier 1 and 17% total.
The negative is that the company’s holdings are concentrated in Roseville, CA and Redding, CA. These were some of the areas at the heart of the mortgage crisis and were also areas that had a lot of speculative building. Not surprisingly the company is still unwinding some non-performing construction loans and mortgages. The companies loan portfolio looks like it is improving and the insider buying provides a vote of confidence. There is risk in this company, but it is well capitalized and in a good position to survive. For value investors, the valuation is pretty cheap and the dividend is great. This company is worth looking at.