When insiders buy their own stock, it can often suggest they think the stock is undervalued. Cynics may argue that a tiny purchase by an insider who is himself worth gazillions may not mean anything, especially if the stock has been languishing.
The truth is most people see through that, and even really rich people hate losing money, no matter how small an amount it may seem. In other words, when insiders buy, you should pay attention. The more they buy, the more attention should be paid.
However, here’s another thing to consider when you see insiders buying a stock. It may not only portend good things for that company, but for others in the sector.
For instance, I’ve been following theme-park operator Cedar Fair (NYSE:FUN) for a while. Ever since shareholders nixed a private buyout at $11 per share, Cedar Fair has proven to be fun for those same shareholders because the stock has since doubled. Some of this is due to management finding ways to boost value, but most of it has been driven by consistent increases in attendance at the company’s theme parks.
Plus, insiders have made a whopping 43 purchase transactions in the past two years, with 15 coming in the past six months. One director even purchased 4,225 shares as late as November at $21.50. The stock is presently at $24. This shows a lot of confidence in the company’s plan, and its ongoing growth.
Does this bode well for other stocks in the leisure sector? I think it may, and here’s why.
Theme-park visits are discretionary spends, and it isn’t cheap to bring a family of four along for the day. There are fees for parking, admission, food and beverage (at inflated prices), and souvenirs.
It may also entail a stay at a local hotel.
So I’d take a good hard look at the hospitality sector. The numbers there are improving. The average daily rate (ADR) for hotel rooms is on the rise (up 3.7%) after plummeting an unprecedented 10% in 2009. Occupancy, which also hit a record low of 55% in 2009, is back up to 60%. Revenue per available room (RevPAR), which was destroyed to the tune of -17.2% in 2009, came back 5.9% in 2010 and 7.8% in 2011. New supply is restricted. It’s all looking good.
That means investors should look seriously at hospitality. I like Ashford Hospitality Trust (NYSE:AHT), which has inexplicably sold off 35% in recent months, despite being the REIT that managed its liquidity and debt maturities better than any of its peers during the financial crisis. It also kept paying on its generous preferred dividends (Series D at 8.45%, Series E at 9%).
I’d also grab Wynn Resorts (NASDAQ:WYNN), which finally sold off from a stratospheric high and is on sale at 33% off, with expected growth of 16% this year.
Another place to look for improving metrics is Vail Resorts (NYSE:MTN). People are skiing again, also not an inexpensive choice for leisure. Earnings are expected to rebound a whopping 50%, with long-term growth of 15%.
Finally, if you want to get more diversified, you can do worse than Walt Disney (NYSE:DIS).
While unemployment remains high, many families are apparently finding those discretionary dollars somewhere. Just keep an eye on theme-park attendance figures and hotel RevPAR to guide you.
Lawrence Meyers holds shares of Ashford Hospitality Trust.
