One of the hardest things to do in the stock market is to time the bottom in a falling stock. That’s because momentum is a very real thing. Stocks that have been trending higher, usually continue to trend higher. Stocks that have been trending lower, usually continue to trend lower.
But that doesn’t mean investors should completely avoid buying the dip in falling stocks. Those can often turn into some of the most profitable trades.
Instead, it means investors should be very selective in buying dips and pay attention to the clues surrounding these falling stocks.
One such clue is insider activity. That is, investors should look for falling stocks which insiders are buying on the dip, since this show of confidence from insiders is usually a bullish sign that the worst is over and a bottom is close.
With that in mind, let’s take a look at five cheap and falling stocks that insiders are buying the dip in, and see whether or not these stocks have actually bottomed.
Insider Buying Stocks: Ulta (ULTA)
Shares of cosmetics retailer Ulta (NASDAQ:ULTA) fell off a cliff in late August after the company reported ugly second-quarter numbers which missed revenue and profit estimates, and also included a cut to its full-year profit guide.
In the wake of that big selloff, insiders have turned bullish. Specifically, there have been five open market purchases of ULTA stock since the post-earnings selloff, led by long-time board member Charles Heilbronn. This was the guy was cashing out on ULTA stock on the way up — before the plunge. Thus, the fact that he’s buying the dip now is a bullish reversal sign.
Indeed, Heilbronn is part of a broader reversal here. Over the past three months, there have been zero insider sales of ULTA stock. Compare that to the prior nine months, where there were 37 insider sale transactions. In other words, insiders aren’t selling anymore.
Does that mean the worst is over for ULTA stock? I think so. The post-Q2 selloff was overdone. Sure, the numbers weren’t great, and the growth narrative here is slowing. But, this is a still a very strong company, supported by secular cosmetics adoption tailwinds, healthy margins, direct retail expansion and a big unit growth runway.
In the long run, those strong growth drivers will power profits significantly higher. As those profits trend higher, so will ULTA stock.
The Tile Shop (TTS)
Struggling retailer The Tile Shop (NASDAQ:TTS) recently reported really ugly third-quarter numbers in late October that included negative comparable-store sales growth, margin erosion, a net loss and a surprise delisting announcement. In response to the ugly print, TTS stock lost more than two-thirds of its value.
In the wake of the huge selloff, though, insiders stepped up. Board member Peter Jacullo bought roughly 2.4 million shares over the span of a few days, while the chief financial officer and chief accounting officer both acquired about 60,000 shares. In response to this vote of confidence from insiders, investors have bought the dip, too. From its post-earnings lows, TTS stock is already up 90% — and it’s only been a few days.
Will this rebound last? It’s tough to say. At current levels TTS stock is certainly cheap. But, revenues, margins and profits are all dropping. Current fundamentals imply that they will keep dropping, as The Tile Shop finds itself as an undifferentiated retailer in a crowded building materials space that is rapidly consolidating around leaders like Home Depot (NYSE:HD) and Floor & Decor (NYSE:FND).
As such, this insider-driven rebound in TTS stock may just be a head-fake. Until the fundamentals turn around here, caution is warranted.
Stage Stores (SSI)
Depressed department store operator Stage Stores (NYSE:SSI) has been the recipient of significant insider buying over the past three months as the company has more aggressively pursued its discount-oriented turnaround plan.
Here’s the story. Stage Stores owns two types of stores — full-price stores and off-price stores. The full-price stores aren’t doing well. The off-price stores are doing much better. But, most of the company’s stores today are full-price stores. Management wants to change that. They want to close some of those full-price stores and turn the rest into off-price stores. Thus, the big plan here is to turn Stage Stores into a mini TJX (NYSE:TJX) or Ross Stores (NASDAQ:ROST).
Will it work? It could. And, if it does, SSI stock could turn into a multi-bagger in the long run. Just look at the sales multiple on SSI. It’s below 0.05. Now look at the sales multiples on TJX and ROST. They are each north of 1.8.
Insiders clearly believe in the plan. Over the past three months, as the company has converted multiple full-price stores into off-price ones, there have been 10 open market insider purchases, and just one insider sale.
Should you buy in too? That depends on your risk appetite. The stock has come very far, very fast, so if the turnaround plan doesn’t work as hoped, the stock could fall a lot from here. At the same time, there’s also a bunch of upside potential in the event the turnaround does work. It’s a typical high-risk, high-reward situation — and it’s tough to say which way the stock will go next.
Shares of struggling video game retailer GameStop (NYSE:GME) have been in a secular decline for several years now, as revenues and profits have been wiped out by a shift from physical to digital video games.
But, GME stock has essentially doubled since mid-August amid renewed optimism regarding the company’s growth prospects in 2020 and 2021. Specifically, at the end of 2020, PlayStation and Xbox are set to unveil new generation video game consoles for the first time since 2013. That is supposed to create huge tailwinds throughout the entire video game industry, and those tailwinds should power meaningfully improved results at GameStop.
Ahead of this game-changing catalyst, investors and insiders alike are buying GME stock in bulk. In September 2019, five different insiders executed six different open market purchases of GME stock — the first open market purchases by insiders since September 2016.
The big question now is will the big rebound in GME stock continue? I think so. There’s a lot of optimism out there regarding the 2020 video game console upgrade cycle, and all this optimism will continue to translate into strong demand for GME stock.
Kraft Heinz (KHC)
A lot has gone wrong for global consumer staples giant Kraft Heinz (NASDAQ:KHC) over the past few years, as an obsession with cost-cutting has come at the expense of growth. But, one thing that has gone right over the past few months is that insiders are finally starting to buy the dip in beaten up KHC stock.
Over the past twelve months, KHC stock has dropped 40%. For the first nine months of that selloff, insiders refused to buy the dip. There were zero insider purchases during that stretch. But, over the past three months, insiders have fully embraced a “buy-the-dip” mentality. During this stretch, there have been a whopping 22 insider purchases.
This insider vote of confidence has sparked life back into KHC stock. Most of the insider buying started in mid-August. Since then, KHC stock is up 13%.
Will this newfound strength in KHC stock persist? It could. There’s a new management team here, and this new management team is less obsessed with cutting costs than its predecessors. Instead it’s more obsessed with organic growth. That’s the right mindset to adopt going forward. It should stabilize revenue growth and return the company to positive profit growth.
If that happens, then KHC stock — which presently trades at just 12.6 times forward earnings — has plenty of room to run higher.
As of this writing, Luke Lango was long ULTA, TJX and GME.