With the recent market rally, it has become harder to find undervalued stocks to buy. The Dow Jones Index is now near 4 1/2-year highs; however, there are still opportunities to find bargains. Buying a stock that has dropped in price or that appears undervalued is not always enough. Sometimes stocks that are cheap just get cheaper over time, and that is why investors also have to consider whether a stock will be a "value trap" or an investment that will actually produce gains.
One way to boost the chances of avoiding potential value traps is to follow insiders. Executives and directors tend to know their companies better than outside analysts and investors. That is why so many people follow when insiders buy and sell. Investors who follow insiders into stocks can see major rewards. For example, Sprint (NYSE:S) CEO, Daniel Hesse, bought 50,000 shares for $2.38 in April 2012, and since then, the stock has just about doubled in value. Those types of gains make insider buying worth following. Below are two stocks that appear undervalued and have also recently had significant insider buying:
Williams Companies, Inc. (NYSE:WMB) is a leader in the energy pipeline business. It owns and operates about 13,700 miles of natural gas pipeline which runs through several states including Texas, Louisiana, Mississippi, Alabama, Georgia, South Carolina, North Carolina, Virginia, Maryland, Pennsylvania, and others. It also operates a pipeline network of nearly 4,000 miles in Western states like New Mexico, Colorado, Utah, Wyoming, Idaho, Oregon, and Washington. Since this company completed a spin-off of WPX Energy (NYSE:WPX) (an exploration and production company), it is now considered to be a pure play in the pipeline business and this makes the company more focused. It also increases stability and eliminates the risk that comes with exploration and drilling. Williams has been raising the dividend on a regular basis, and it was increased again in 2012. This brings the yield to about 4%, and it could continue to grow in the future. Williams insiders appear to see the shares as undervalued. On August 9, 2012, Murray Smith, a director, purchased 3,500 shares for a transaction valued at about $110,000.
Here are some key points for WMB:
Current share price: $32.31
The 52-week range is $21.90 to $34.63
Earnings estimates for 2012: $1.19 per share
Earnings estimates for 2013: $1.41 per share
Annual dividend: $1.25 per share for a yield of 4%
Walter Energy Inc. (NYSE:WLT) is one of the largest producers of metallurgical coal, which is used by the steel industry. It also produces industrial coal, steam coal, anthracite, metallurgical coal, as well as coal bed methane gas. Walter Energy shares have plunged from a 52-week high of about $97, to just around $36 recently. The entire coal sector has been hard-hit by excess inventory and reduced demand. This has put pressure on coal prices. Reduced profit margins have led many companies in this industry to post losses. For example, Alpha Natural Resources (ANR), another leading coal producer, recently reported substantial second quarter losses of $2.2 billion or $10.14 per diluted share. (Part of this loss was due to restructuring and long-lived asset impairment charges totaling $1.0 billion.) However, Walter Energy is profitable and it recently announced second quarter net income at $32 million or 51 cents per diluted share. Walter Energy appears undervalued and well-positioned for an eventual turnaround in coal prices, and insiders seem to agree. On August 7, 2012, David Beatty, a director, purchased 5,000 shares for a transaction valued at about $187,450. Another director, A.J. Wagner, also purchased 5,000 shares on August 6, 2012, in a transaction worth around $186,250.
Here are some key points for WLT:
Current share price: $36.52
The 52 week range is $31.33 to $97.30
Earnings estimates for 2012: $2.81 per share
Earnings estimates for 2013: $5.29 per share
Annual dividend: 50 cents per share which yields 1.4%
Data is sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.