The downside with insider sales is that you never really know the reasons why a given insider chose to sell the amount of shares they did, and why they chose to do so at the time. Maybe it’s because they need to diversify their investments, maybe it’s because they want to cash in some of their winnings, and maybe its because they know the company is about to implode.
That’s why insider buying tells you a lot more. Very few people are going to risk their own hard-earned money purchasing stock of the company they work for unless they feel pretty certain the stock is undervalued, or they expect the stock to outperform other investments in the medium-to-long term.
Rarely, however, do other investors get the chance to buy in at or below the prices the insiders did. The price may have fallen for any number of reasons that have nothing to do with the long-term fundamental outlook. Regardless, you have to figure that there was insider buying at an even higher price, there’s probably a floor to the stock price that you can be fairly certain of.
With that in mind, let’s look at three stocks that will let you beat the insiders:
Gulfmark Offshore (GLF)
In November and December of last year, director Robert Millard of Gulfmark Offshore (GLF) purchased some 74,000 shares between $44.19 and $48.71 per share. Earlier this year, another director purchased 2,800 shares between $44.72 and $49.16. The stock is at $44.88, which is lower than the average price either director bought at.
Gulfmark is a support company for the offshore oil and gas industry, operating transport vessels to help offshore rigs get set up and built. It has diversified into fleets for third-parties, but that’s only about 10% of its 80-ship operation. Geographically, its headquarters are in Houston, but its fleet hangs out in the North Sea, Southeast Asia and in North and South America.
The insider buying likely happened because FY14 EPS is slated to rise 53%, and another 18% in FY15. Insiders do not appear concerned that the company has been FCF negative for the past two years. Perhaps the increase in EPS will change that trajectory.
United States Steel Corp. (X)
I can’t say I’ve ever really thought about United States Steel Corp. (X). The legendary steel manufacturer has never been on my investing radar because I don’t really understand the steel market, other than it being highly cyclical. U.S. Steel has lost tons of money for several years in a row, has been suffering negative FCF, but EPS is slated to turn positive this year to $1 per share and then double next year.
On January 3, director Robert McDonald purchased 1,000 shares at $29.84 per share. U.S. Steel has been increasing its cash position, and the last two quarters have turned profitable, giving credence to the EPS comeback. The stock is at $27.36, so it is below the insider buying price point. It’s difficult to say how the stock will perform over the long term, but I trust an insider’s view more than my own.
Steel companies haven’t had a great track record, as many have gone out of business over the years. Still, U.S. Steel has survived. The company also has a new CEO, so it sounds like things are headed in the right direction.
Cliffs Natural Resources (CLF)
Cliffs Natural Resources (CLF) has seen insider buying twice in the past year and a half. One director picked up 1,040 shares last Novemer at $28.33. Another grabbed 250 shares at $23.92. The stock is now at $15.49. The drop may be due to the fact that the company produces iron ore (good) and metallurgical coal (not so good, due to regulatory issues).
CLF has 16 mines throughout the U.S., but also owns and operates some exploration entities seeking resources in Canada. It has a more solid cash flow situation, in that it usually is $1-2 billion in the black on a FCF basis. It had a big write-off in 2012, but before that was doing very well and continues to generate a profit. The regulatory issues are weighing the stock down, but with the stock almost 50% of what it was since the last insider buy, you have to figure there’s a potential bargain here.
In this case, I would actually wait for the next major instance of insider buying before jumping in.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.