Investors who solely look at valuation metrics such as price-to-earnings and price-to-book ratios miss the full picture. Sometimes a stock is cheap because earnings are expected to decline in the future. So a 9x P/E ratio today could turn into a 20x P/E in the future.
Even investors valuing a company using a discounted cashflow methodology are simply making an educated guess about future earnings. Very smart investors can have wildly different views about the future cashflows of a business.
If professional analysts who spend 10 hours a day analyzing businesses and industries can't agree, what hope is there for the average Joe straining over his portfolio at the kitchen table after the kids go to bed? Individual investors must seek advantages wherever they can. Sites like Seeking Alpha are a great start. Discount brokers and low-fee ETFs are also helpful.
Another strategy many investors use is to follow those with an information advantage - company insiders.
Despite the legal boundaries that prohibit insiders from acting on non-public, material information insider trading still occurs. Insider trading on a piece of non-public information that could move a stock - e.g. a tender offer - is illegal, and many companies have safeguards to prevent such acts. However, insiders will still piece together dozens or hundreds of pieces of information that, on their own, are immaterial, but when pieced together paint a picture of the future of the company and industry. Some refer to this as mosaic theory. Company insiders are immersed in the daily operations of their businesses and can piece together information based on vague cues. So when I see them heavily buying their own company stock I take notice.
Below I have listed eleven companies that have recently experienced a heavy increase in insider ownership. These stocks are also trading 20%+ below their 200-day moving average.
Note: this is a screen based on historical characteristics, and is not a fundamental analysis of the company's prospects. Screens are simply the first step in a multi-step research process.
|(NYSE:NEM)||Newmont Mining Corp.||Gold|
|(BTU)||Peabody Energy Corp.||Industrial Metals & Minerals|
|(NYSE:S)||Sprint Nextel Corp.||Wireless Communications|
|(NYSE:NFX)||Newfield Exploration Co.||Independent Oil & Gas|
|(NYSE:FTR)||Frontier Communications Corporation||Telecom Services - Domestic|
|(ANR)||Alpha Natural Resources, Inc.||Industrial Metals & Minerals|
|(NASDAQ:NIHD)||NII Holdings Inc.||Wireless Communications|
|(NASDAQ:ROVI)||Rovi Corporation||Multimedia & Graphics Software|
|(NASDAQ:PTEN)||Patterson-UTI Energy Inc.||Oil & Gas Drilling & Exploration|
|(NYSEMKT:ANV)||Allied Nevada Gold Corp.||Gold|
|(NYSE:ITT)||ITT Corporation||Diversified Machinery|
As you can see, these stocks are trading well below their 200-day moving average and are arguably ripe for some sort of rebound. Meanwhile, insiders may recognize this as insider ownership has risen over the past six months (insider ownership may include insider buying, option exercises, etc.):
|Ticker||% Below 200 Day Moving Average||6 Month Change in Insider Ownership|
Remember, as mentioned earlier, a beaten down price doesn't necessarily equate to value. You can see below that the valuation metrics for these companies vary quite widely. Personally, I find the companies trading near or below book value and at a low price-to-cash ratio particularly interesting (S, ANR, NIHD). (Is it just me or are telecom companies regularly showing up in value screens?)
Looking at profitability, you can see why some of these companies have had such weak performance. Regardless, most appear to have decent ROE and margins. Also note that, since these are historical metrics, one needs to determine the prospects for future profitability, which could differ considerably from the past.
|Ticker||ROE||Operating Margin||Profit Margin||Performance (Year)|
When looking at beaten-down stocks, which have the potential for declining future earnings, I pay special attention to debt ratios. A company with less debt is more financially flexible to navigate periods with weak earnings. In contrast, a temporary setback could be disastrous for a highly levered business.
While all eleven stocks deserve further research and analysis, I would pay particular attention to S, ANR and NIHD to see if the combination of valuation, profitability and indebtedness warrant a 'buy' decision.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Data source: Finviz. This is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.