Harsco Is Worth Considering

 | Mar 11, 2014 | 3:30 PM EDT  | Comments
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During the course of some of my tortured Excel hacking studies of insider buying and returns over the past few years I have found that when the top two executives of a company, the CEO and CFO, made open market purchases of $50,000 or more, there was a huge positive expectation over the next year.

While the stocks that show up on this screen are not always classic value picks, they are usually excellent candidates for both investors and traders alike. If you are trading in a one-month or longer time frame, why on earth would you try to swing trade the same stocks as everyone else? Taking 10 minutes to run this screen will produce a list of stocks with a strong directional bias -- regardless of market conditions. I suspect most traders could improve their results markedly by concentrating on stocks with the top two insider buyers instead of the list of popular stocks that are currently on their screens.

Harsco (HSC) is one of the more interesting companies on the list. This industrial company operates in several divisions. The metals and mineral segment of the business provides fun services such as slag processing, inventory management and scrap management for the steel industry. This division also provides environmental solutions for the waste streams created by its metals-and-mining customers as well as abrasives for industrial surface preparation derived from coal slag. The rail division manufactures railway track maintenance equipment; and provides track maintenance services while the Industrial division makes things like air-cooled heat exchangers, and boilers and water heaters for industrial and commercial facilities. It is a classic old school U.S. industrial company that has been in business since 1850.

As its poor fourth-quarter earnings report showed, business has been less than stellar for the company. Revenues and earnings decreased and analysts hate the stock right now. Earnings expectations for this year and next have been lowered several times in the past couple of months. The CEO left to take another job last week and the company is currently operating with a temporary CEO. The stock has moved down more than 20% over the past year and has declined more than 8% in just the last month.

A deeper dig turned up many more positive things that the company is not getting credit for in the market right now. In November, management sold their infrastructure division for $300 million. Harsco landed two contracts worth more than $200 million for Chinese steel manufacturers for their processes for metal recovery, the conversion of slag into a cement substitute. Earlier, they landed a large contract with an Indian steel manufacturer for the company's proprietary separation technology that is used to convert slag by-products into calcium nitrate. They are also expanding their metals recovery operations in Latin America.

In Harsco's last earnings announcement, management was far more upbeat than you might expect for a group who was delivering disappointing results. In the release, company officials said: "Our 2014 outlook includes double-digit growth in operating income from our three business segments as well as double-digit cash flow from operations." The guy who counts the money must think the goals will be achieved as CFO Nicholas Grasberger has opened his wallet and purchased 50,000 shares of stock for about $1.1 million in the past week.

The stock is not a classic value situation, but it is a very strong turnaround candidate. You get paid to wait for improvements with this stock as the shares yield 3.7% at the current price. To look at it from a trader's point of view, I turned to Real Money Pro columnists, Tim "Retro" Collins and Bob "Yeti" Byrne for the traders' perspective.

Collins thought that although it's a pretty ugly chart, if the stock does not take out last week's low, then that huge volume push should serve as support. That would put the stock sitting right on support at the current price. Byrne agreed that it was a pretty ugly chart, but noted that it has support at $21; however, the chart looks so weak that he would probably hold out for a $19 test.

Harsco has struggled of late but the CFO is a big buyer of the stock the open market. Plus, the company has landed some large contracts that should drive an earnings rebound. The stock looks interesting for both traders and turnaround investors at this price.

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