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 | Jul 26, 2013 | 4:30 PM EDT  | Comments
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Stock quotes in this article:

indb

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mflr

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pulb

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jakk

One of the screens I run from time to time in my search for ideas is what I call the good vs. evil screen. I simply look for stocks with high short interest ratios that are also seeing insider buying. The short sellers have a reason to think the stock is due for a fall. The insiders just as clearly have reason to think the company is worth more than the current stock quote.

Somebody's going to be right and somebody's going to be wrong. Therefore, there is money to be made from the situation. Sometimes the shorts are right in the short run and the insiders prove to be right in the long run. Either way, there is still going to be a point where the shorts have to cover and create buying pressure in the shares.

Independent Bank (INDB) is a 106-year old bank that operates out of Rockland, Mass. It is the holding company for Rockland Trust Company. It has 74 branches, 10 commercial banking offices as well as four investment management and three mortgage offices. The bank has more than $5 billion in assets and recently increased its base by announcing its acquisition of Mayflower Bancorp (MFLR) bank. Some of the short position could be arbitrage-related in nature.

The shares of Independence Bank are not excessively cheap -- they are trading at a little more than 1.5x book value. The bank has a great loan portfolio and less than 1% of loans are classified as nonperforming. Several directors of the bank have been buying stock in the open market of late, so they seem to have confidence that the shares will move higher over time.

In spite of a hefty dividend and no pending transaction that might create an arbitrage situation, Pulaski Financial (PULB) also has a large short interest ratio. Insiders have been consistent buying shares of the St. Louis-based bank all year. The bank has 13 branches and a little over $1.3 billion in assets. It has had some problems with nonperforming loans but the Nonperforming assets and non-performing loan ratios have been declining steadily for several quarters now.

With nonperforming assets at 3.4% of total assets, it is not the prettiest bank I have ever seen. But it's a long way from being the ugliest. The stock trades at 1.1x book value and has an adequate capital with an equity-to-assets ratio of more than 10. The stock price has been improving over the past year and its 28 days average volume is sold short. At some point, the shorts could throw in the towel, and we will see a pop in the stock.

Even though the stock has cratered after a disastrous earnings report, Jakks Pacific (JAKK) is on the list with a very high short ratio: 11 of the float and 16 days volume are still short in the battered toy company. Last month, the company reported that sales had plunged by more than 27%. It posted a loss of $2.14 a share even though analysts were looking for about $.05 per share shortfall. The company's book value fell by about a third and management suspended the quarterly dividend. So it was an absolute disaster of a quarter. The stock has fallen by more than 50% in the first half of the year. The shorts have gotten paid but they have not all covered yet.

Billionaire Patrick Soon-Shiong, a beneficial owner of the company, recently spent $9.9 million to increase his stake in the firm to more than 4 million shares. He is thought to be the wealthiest people living in the Los Angeles area. He made his money in biotech by funding and eventually selling two multibillion dollar drug companies.

This very smart and successful investor and businessman owns NantWorks, which is in a joint venture with Jakks to develop smart toys. This project is just getting off the ground. I have owned Jakks before and I am intrigued by this smart investor's large purchase. If the stock continues to decline, there is a good chance I will buy it again.

This type of screen does not always produce a "buy right this second" list of stocks but it does provide a very fertile hunting ground for research candidates. Both Pulaski Financial and Jakks seem to be worth additional investigation and could be strong candidates if and when the market ever declines.

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