Insteel Industries On a Tear -- Smart Momentum Play? (IIIN)

| About: Insteel Industries, (IIIN)

Insteel (NASDAQ:IIIN) has been blasting off in the past 30 days. This is an interesting stock - the fundamentals look very good. This appears to be a well run company, with good financials and nearly no debt. They make steel reinforced concrete products. They gapped up in early February and have moved up 20 points since that day.

With the steepness of the increase one could be concerned that this might collapse. On the other hand, it could also start to make its way into the mainstream a little more. It's hard not to think about this as a momentum play right now.

Whenever I look at a stock, I try to digest it from 3 angles: technical, fundamental, and what I call the trading situation.

At first glance, the technical analysis of this graph clearly identifies a stock in a huge uptrend, probably an unsustainable one at that. Yesterday's trading in it was down roughly 3%, which is either a nice entry point -- or prelude to disaster. I could lie to you and tell you that I knew which one, but I don't. The striking thing about it is how unnatural this rapid rise looks - normally stocks don't behave in this manner. On the volume side, we see a stock that had very, very little volume in the 4th quarter last year go to a stock that is trading almost 1/2 a million shares a day.

From a numbers standpont we have a small, well run company with earnings growth and little debt. This past quarter, they used the strong cash flow to pay down debt. This seems a little strange, since a small growing company would probably best be served investing cash flow into new plants, equipment, employees, etc. to grow future earnings.

The trading situation of this stock is a little more interesting. Fidelity is about a 10% owner of IIIN (or was as of 12/31). This stock was clearly off the trading radar until this past month. Even now little is known about it. It doesn't do press releases. If you look at the tight trading range each day and the steady daily increase in price, it looks as if someone (probably an institution) is quietly buying this stock up. More interesting is the extremely low float - 10M shares, which means for the last week or so, 3-5% of the float has been trading each day.

I could come up with a justification for shorting this on technical grounds. I also happen to think that this stock is still pretty cheap with a forward PE of 9. Another part of me thinks that a potential reason for the buy down of debt might have been to clean up the books as a prelude to marketing the company as a takeover target. Alternatively, our takeover could already be quietly in process right now from either a bigger player in the industry or a private equity firm.

I visited the dregs (translation: message boards) and heard an interesting rumor that brokers can't find IIIN shares to short. This would seem to gybe with a potential takeover since a private equity firm would probably not allow its shares to be sold short, but in reality I trust the people that dwell in those pits less than I would a trust a kleptomainiac in a room full of baubles.

No recommendations, other than to check this out for yourself. I welcome comments if anyone has them.

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