Look for Insider Activity

 | Feb 09, 2012 | 1:00 PM EST  | Comments
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Stock quotes in this article:

mro

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hes

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pten

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cmrg

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nihd

Last week, I took a look at companies that traded below tangible book value and had recent insider buying. Today, am looking for companies where insiders are buying and the shares are cheap on another of my favorite valuation metrics.

Enterprise value to earnings before interest, taxes, depreciation and amortization (EBITDA), or EV/EBITDA, is a metric that many of my private equity and leveraged buyout (LBO) friends tell me is their main search criteria. It measures that value of the company based on all capital debt and equity that is invested net of cash balances compared to how much cash the company is generating. EV/EBITDA allows for cross industry comparisons and also gives a clear picture of how much leverage can be used to finance a transaction. The lower the number, the more attractive a takeover candidate a stock may be for leveraged financial buyers of the company.

With that in mind, I fired up Real Money Pro contributor Jonathan Moreland's excellent screener and went looking for cheap stocks that have insider buying. I came up with an interesting list of potential buy candidates where corporate officers and directors are enthusiastic about the future and either buying stock in the open market or exercising options and keeping the shares. Please keep in mind that as with all screens producing a list of names is a starting point. Always do the additional homework before buying a stock and make sure it fits with your personal philosophies and investing style.

One sector that leaps off the page is the oil and gas sector. Energy stocks have been fairly cheap on an EV/EBITDA basis for a couple of years now and I think this is going to lead to a huge M&A wave in the group. Companies such as Marathon Oil (MRO) and Hess Oil (HES) are very cheap on this metric and I would be less than shocked to see them eventually bought or merged with another company. Domestic drillers like Patterson UTI (PTEN) are also very cheap and seeing positive activity buy corporate insiders. I have been accused of sounding like a shill for oil companies when I say this but for the next several decades or path to energy independence is still oil and natural gas. Merging is going to make sense to deal with increasing production and regulatory expenses going forward and it is cheaper to expand your business on the floor of the stock exchange that it is by drilling new fields or opening new outlets.

I am not big on retail stocks right now but one name on the list has been mentioned by several very smart people of late. Casual Male Retail Group (CMRG) not only come up in conversation but I see several very smart investors including Royce Funds have large stakes in the company. I am neither big nor tall so I have never had cause to enter one of their locations but friends have told me that they like the store. The stock is cheap after the reduced guidance issued by the company after a sluggish fourth quarter. After the selloff casual Make has an EV/EBITDA ratio of just 4.7 and trades just above book value. Insiders have snapped up over 100,000 shares in recent months.

NII Holdings (NIHD) is one of the more interesting companies on the list. The Virginia based company provides wireless services under the NEXTEL brand in South America locations including Mexico, Brazil, Argentina, Peru and Chile. South America is a fast-growing region and this company is reaping the benefits. In its last earnings report, the company said that its subscriber count had grown by 19%, year over year. Management  expects to add an additional 1.6 million subscribers in 2011. The shares are cheap with an EV/EBITDA ratio of just 3.39 and insiders have been buying shares aggressively. In the last few months, officers and directors have purchased more than $2 million of shares.

Combining valuation measures such as tangible book value and Enterprise Value to EBITDA with positive insider activity can often help find out of favor companies where fortunes are ready to turn around leading to solid investment results.

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