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An Insiders’ Guide to Buying the Recent Pullback
By Michael Brush
Exclusively for InvestorIdeas.com
June 14, 2007
Once again, I’m not buying it. A lot of insiders aren’t, either.
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Since June 4 th, investors have been selling stocks hard, concerned that interest rates have gone up. We had a nice rebound Wednesday, but the bears are saying it’s only a temporary respite.
I don’t buy it. Sure, we could see the major indices move back down and test recent lows, or worse. But I think any return to selling of this sort will only create a buying opportunity. Below, you’ll find my guide to five stocks to consider picking up, because they had the most notable insider buying in the recent turbulence.
Before we get to them, here’s a look at why I think the recent weakness is not a sign of more trouble ahead for stocks.
Bond bulls finally gave up
That thud you heard in the bond market in the past week was really the sound of bond bulls finally capitulating. They had placed a big bet that the housing sector weakness would spread and bring down the rest of the economy. That would force the Fed to cut rates, which would spark a bond rally.
It looks like they’re finally admitting they were wrong. To be sure, the housing sector weakness could worsen – and their scenario could still play out. But throughout the ongoing bout of housing sector trouble, construction employment hung in there thanks to strength in commercial building. And the consumer did too, thanks to overall strong employment and wage increases.
This helps explain why economists at both Merrill Lynch and Goldman Sachs finally gave up on their Fed rate cutting scenario recently. Bond guru Bill Gross also went bearish on bonds, finally. That meant many of those investors with bullish bets on bonds followed their leads and gave up at the same time – selling bonds and driving them down over the past week. Of course, this drove yields up sharply. This is the explanation offered by Ed Yardeni of Yardeni Research.
But so what. Inflation still doesn’t look bad, with the core rate at around 2%. And the increase in bond yields could deepen the housing recession. “That should put a lid on this jump in bond yields,” says Yardeni. Yet there is still enough stimulus to keep the economy going – in the form of foreign growth, high employment levels in the U.S., continued healthy wage gains.
Meanwhile, stocks still look cheap because earnings have been going up faster than stock prices for years. The S&P 500 has a price earnings ratio of around 15, which is not historically expensive by any means.
One thing I don’t like is that sentiment still remains fairly high among stock market commentators and newsletter writers. This is a red flag. But on the other hand, short interest in New York Stock Exchange issues remains remarkably high. So it’s hard to argue that investors are overly bullish.
With the proviso that the recent turbulence may not be fully behind us, here are five stocks that look like buys in the current pullback, based on insider purchasing.
Shares of Overseas Shipholding Group (OSG) fell dramatically to around $73 from $81after a nice run from the start of the year. Obviously investors are worried that a hike in interest rates could slow world growth and hurt global shipping. But at least one insider at Overseas Shipholding disagrees. In the recent weakness a director bought around $324,000 worth of stock at around $73.50
As a homebuilder, Brookfield Homes (BHS) has been hit hard by housing market woes. The stock is in a major pullback from $55 in the fall of 2005. It fell sharply again in the past week to around $29.50 from around $32. In the pullback, chief executive Ian Cockewell bought about $4 million worth for prices between $29.70 and $30.50. He’s purchased $6.4 million worth since late March. Brookfield Homes makes primarily to move-up and luxury homebuyers.
Colonial Properties Trust (CLP) is a real estate investment trust (REIT) that operates multifamily, office, and retail properties in several states. Its shares fell to $47 from $50 in early June. In the pullback a person considered an insider because of greater than 10% ownership bought nearly $1 million worth at an average price of $47.93, according to InsiderScore.com. Colonial Properties offers an annual dividend yield of 5.5%.
Kinder Morgan Management (KMR) owns a big stake in the energy pipeline company Kinder Morgan Energy Partners. In the recent downtrend it fell to $50 from $52, and four insiders bought around $2 million worth of the stock for around $50 to $50.90.
Consolidated Tomoka Land (CTO) is a former timber company that owns lots of land around Daytona Beach, Fla. The land is probably worth more than the company's market capitalization, says David Winters, a portfolio manager at Wintergreen Advisors. The land may go up in value because of development around Daytona Beach, and the company also has a commercial real estate business (http://articles.moneycentral.msn.com/Investing/CompanyFocus/5StocksInsidersBoughtInTheBlowoff.aspx). Winters is continually a big buyer of this stock on pullbacks. And he was at it again in the recent turbulence which saw Tomoka fall to around $70 from $75. In this pullback, Wintergreen Advisers purchased $3.9 million worth of the stock for prices between around $70 and $73.
The bottom line : I’ve been saying “buy the pullbacks” for so long I am starting to sound like a perma-bull and that bothers me a little bit. But I don’t really see why the recent weakness is a sign of prolonged trouble. It’s more likely just the fallout from bond bulls giving up and throwing in the towel. That makes it a buyable pullback, and as always it makes sense to follow the insiders in these scenarios.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp . InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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