I’ve been tracking the moves made by insiders for more than two decades -- but recently, I’ve been paying less attention.
That’s because my experience has shown that following the moves of insiders in a rising stock market isn’t fully helpful, as a rising tide lifts all boats anyway, and stocks with heavy insider buying don’t tend to outperform.
The same can be said for a falling market. Even the stocks that have solid recent insider support can’t avoid a market downdraft.
There is, however, one market phase in which I focus more on insider transactions: a sideways market.
When many stocks are stuck in a holding pattern, it's been my experience that the select few that are supported by insider buying often manage to break out on the upside. (I'm relying on years of experience with these insider signals, not empirical data, to support this assertion.)
It looks like we’re in a sideways market once again. At a recent 1,680, the S&P 500 Index is close to where it was in late May. And the push/pull dynamic of a moderately growing economy and tepid corporate profit growth may lead us into an extended sideways market. In effect, there are too many reasons precluding the market falling out of bed (strong balance sheets, robust cash flow) or rising sharply (increasingly extended valuations).
That’s why I’m watching the insiders more closely these days. Here are some notable purchases that have popped up on my screen recently. (All data courtesy of InsiderInsights.com.)
1. Accuride (NYSE: ACW)
This company is notable for its concentrated stock ownership among a handful of investment firms. Coliseum Capital, Cetus Capital and Littlejohn Capital all own more than 10% of Accuride (qualifying them as insiders). And recently, all three firms have added to their stakes, acquiring more than 1 million shares collectively since early June (at an average price of around $5).
It‘s been a bumpy ride since Accuride’s early 2010 IPO, and shares have since fallen by half from its post-IPO trading range. Demand for Accuride’s truck brakes, wheels, bumpers and sets has been slowly building out of the 2008 downturn, though the company has been unprofitable throughout that stretch.
Looking back over the past half decade, this was a company in need of an overhaul. Inventory of raw materials grew bloated, quality concerns led to lost business, and Accuride’s network of factories was too large for the company’s revenue base. New management took the reins in 2011, shuttering a key factory and improving quality control. The company now appears poised to move into the black in 2014, as analysts anticipate earnings per share (EPS) of around $0.60.
Insiders may be loading up on the turnaround prospects, and these shares represent deep value: The enterprise value stands at around $550 million, much less than the projected $800 million revenue base.
2. NuStar GP Holdings (NYSE: NSH)
In recent months, we’ve been focusing on companies with “rich parents.” These are master limited partnerships (MLPs) that can profit from generous capital injections from the parent companies that spun them off. For example, my colleague Elliott Gue cited oil and gas pipeline operator NuStar (NYSE: NS) as example.
Well, insiders spot value at the “rich parent” right now. A pair of directors bought 78,000 shares back in April (at an average price of $30.75). There were additional modest purchases over the summer, and in September, director William Greehey bought another 50,000 shares. The twist? The recent buying was done around $20, after shares had slumped badly.
The share price weakness is the result of a liquidity crunch as the company isn’t generating enough cash flow to support the current dividend. Though investors are worried that the divided may be cut, management recently told analysts that other options will instead be pursued, such as asset sales or overhead cuts. NuStar “stressed that a distribution cut is not actively being explored currently,” reported analysts at Goldman Sachs in Sept. 10 note to clients.
If that dividend is indeed safe, then investors are likely to refocus on it, as it currently yields 10.7%. The insider-buying angle is intriguing, as these insiders also share in the dividend, and if they had a view that the dividend would soon be slashed, they’d be selling, not buying. On top of that yield, shares have 15% potential upside to Goldman’s $26 price target.
3. Lionbridge Technologies (Nasdaq: LIOX)
I recently profiled this low-priced stock, noting that a key shareholders had been acquiring stocks in the open market in previous months. Well, that shareholder, Glenhill Capital, is at it again, making its biggest purchase yet.
In late September, Glenhill bought 175,000 more shares, at prices far higher than previous purchases. Glenhill now owns more than 650,000 shares of Lionbridge and clearly sees further upside in the months ahead.
4. Swift Energy (NYSE: SFY)
Insiders have been stepping up their buying at this oil and gas driller as shares have fallen far from the 52-week high of $19.69. A pair of insiders bought nearly $300,000 in stock (at an average price of $11.75) in the past two months.
Swift has a solid geographic position in South Texas' Eagle Ford Shale, but many of its key wells initially proved to have disappointing levels of output. Those wells are now producing better oil and gas flows, though investors are waiting to see how that will impact cash flow -- a key consideration for a company that has seen long-term debt rise from under $500 million in 2010 to more than $1 billion today.
Swift is expected to discuss asset sales (outside of the Eagle Ford region) when third-quarter results are discussed Oct. 31. If cash flows are indeed starting to strengthen, and the debt load starts to fall (thanks to asset sales), then this beaten-down energy driller may be poised for a rebound.
Risks to Consider: Insiders shouldn’t be confused with stock pickers. They don’t always have a keen sense of whether their shares are overvalued or undervalued. They instead should just be seen as a barometer of business conditions at their firms.
Action To Take --> Insiders tend to be especially active when the market gets choppy, so if this month's troubles in Washington pressure stocks more deeply, you should devote more time to analyzing the moves at insiders, many of whom have a clear sense of their own company’s health, regardless of broader economic distractions.