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Small cap (market cap < $2 billion) companies are usually not followed by analysts, which makes it difficult to start any research on them. Choosing the right small companies to invest in can be daunting; however, insider purchases provide a good starting point.

Insiders, especially executives and directors of small companies tend to know their company very well. Tracking their stock purchase activities can generate lucrative returns. Of course, insiders could get it wrong. It is nevertheless a good starting point to add such stocks to one's watch list.

Below is a list of notable insider purchases of small-cap stocks filed at the Securities and Exchange Commission yesterday. In line with Seeking Alpha's small-cap policy, all the stocks in the table are greater than $1 per share or $100 million market cap.

I have written a short analysis of each company's financial records. However, these are not buying and selling recommendations. I have filtered out transactions with a total value of less than $10,000.

Methode Electronics Inc. (NYSE:MEI) is a diversified electronics company. It has a market cap of $321.40 million. The company pays a dividend of 3.50%. According to yesterday's SEC filing, Methode Electronics had 4 insiders who purchased a total of 9,088 shares at the total value of $71,575. Multiple insider purchase occasions are usually a positive sign. The company's P/E ratio of 39.27 is on the expensive side.

Methode's value seems reasonable with a sub-one PEG ratio, suggesting its growth is outpacing its valuation. Methode Electronics has a reasonable enterprise value/ EBITDA ratio of 8.95. Its profit margin was 2.77% over the past year. I don't like Methode Electronics' operating margin of 3.26%, a sign of the company's shaky financial health. Its revenue grew by 9.70%, and its net income declined by 86.20% during the most recent quarter. The trading volume is relatively normal.

This month, 1.21 million shares are being shorted. Comparing to 1.17 million shares shorted over the previous month, the shared short has increased by 3%. The short ratio of Methode Electronics is 13.10, accounting for 3.40% of floating shares. It doesn't appear to be at a point of entry yet. Watch.

Pulaski Financial Corporation (NASDAQ:PULB) is a savings & loans company. It has a market cap of $81.40 million. This company pays a handsome dividend of 5.30%. According to yesterday's SEC filing, Pulaski Financial had one insider who purchased a total of 2,750 shares at the total value of $19,995. The current price is fairly close to its 52-week high. It has a reasonable P/E ratio of 13.13.

The high PEG ratio suggests that the market expectation may be too high to become reality. Pulaski's price/book ratio is 0.86. It has a profit margin of 18.65%. Pulaski Financial Corporation has a very healthy operating margin of 35.18%. Its revenue declined by 7.50%, and its net income improved by 28.30% during the most recent quarter. Overall, I like what I see.

Republic Bancorp Inc. (NASDAQ:RBCAA) is a Southeast bank. It has a market cap of $487.70 million. The company pays a dividend of 3.10%. According to yesterday's SEC filing, Republic Bancorp had 5 insiders who purchased a total of 891 shares at a total value of $19,823. Multiple insider purchase occasions are usually a positive sign. At a P/E ratio of 4.47, the stock appears fairly cheap in valuation.

Based on its PEG ratio of 0.44, the stock appears undervalued. Its price/book ratio is 0.83. Its revenue declined by 8.00%, and its net income improved by 15.50% during the most recent quarter. Average trading volume is observed lately. This month, 1.12 million shares are being shorted. The short ratio of Republic Bancorp is 33.70, accounting for 11.60% of floating shares. The company appears attractive. But investors should watch for the shorting activities.

rue21, Inc. (NASDAQ:RUE) is a apparel stores company. It has a market cap of $631.40 million. According to yesterday's SEC filing, rue21 had one insider who purchased a total of 800 shares at the total value of $20,184. Its P/E ratio of 15.79 is on the expensive side. Investors should use some cautious because of this valuation. rue21 has an enterprise value / EBITDA ratio of 5.54. It has a profit margin of 5.16%. I believe rue21's operating margin of 8.29% is acceptable.

The company had a net income of $40.93 million and EBITDA of $93.75 million on revenue of $793.04 million. Both its revenue and earnings grew in double digits over the latest quarter, by 18.90% and 20.60%, respectively. The company has $81.85 million cash on its balance sheet and no debt. This month, 4.53 million shares are being shorted.

Comparing to 4.60 million shares shorted over the previous month, the shared short has decreased by 1%. The short ratio of rue21 is 13.40, accounting for 56.80% of floating shares. Such a high short ratio means two things: 1) the market is bearish about the stock in general, and 2) short squeeze could easily happen with suitable news. This stock is okay for your watch list, but not particularly appealing based on its overall financial records.

Worthington Industries, Inc. (NYSE:WOR) is a steel & iron company. It has a market cap of $1.455 billion. The company pays a dividend of 2.70%. According to yesterday's SEC filing, Worthington Industries had one insider who purchased a total of 1,000 shares at a total value of $20,538. The current price is fairly close to its 52-week high. It has a reasonable P/E ratio of 12.51.

Worthington Industries has an enterprise value/ EBITDA ratio of 11.62. Its profit margin was 4.70% over the past year. Worthington Industries, Inc. has a very low operating margin of 4.28%. The company had a net income of $115.43 million and EBITDA of $159.56 million on revenue of $2.45 billion. Its revenue grew by 7.30%, and its net income declined by 1.70% during the most recent quarter. This month, 4.81 million shares are being shorted. The short ratio of Worthington Industries is 8.00, accounting for 8.80% of floating shares.

Source: Small Cap Insider Buys: July 3, 2012