After reviewing the banks that insiders have been buying, it occurred to me that it has been a while since I last looked at insider buying in cheap stocks outside the banking industry.
After driving around north Baltimore in the snow looking for an open Starbucks (SBUX), I came back to the hotel and ran some combination insider and value screens.
My first observation was what I didn't see. I still do not see any widespread buying of energy-related stocks yet. There are many trading under book value but only a few have seen buying by executives and directors. They are either more tight-fisted than other insiders, or they do not think we have seen a bottom in energy prices just yet.
Exxon Mobil (XOM) CEO Rex Tillerson told CNBC this morning, "There is the potential for there to be further pressure on the market for a period of time." With oil storage facilities in the U.S. bursting at the seams, I guess his viewpoint is shared across the industry.
We saw a small flurry of buying in December as the decline began, but in the past month buying has been muted.. Hornbeck Offshore (HOS) is one of the very few oil -related companies that saw buying in the past month. The company provides offshore supply vessels and multi-purpose support vessels primarily in the U.S. Gulf of Mexico and Latin America. Business for Hornbeck is weak and estimates have been falling for the company.
Drilling activity will slow this year and may not rebound for a sometime. Both CEO and CFO seem to think, however, that prices have fallen too far in response to weak oil and gas prices. Both were open market buyers of the shares in this past month. The stock is trading at just 55% of book value now, so if they are right the recovery potential is enormous.
My second observation is that all the experts and analysts that expect the business development companies (BDCs) to stumble next year may end up being very wrong. The people running the BDCs seem to have a very favorable opinion of the future of their companies. The biggest buying in the past month was at Fifth Street Finance (FSC), a BDC that reduced its dividend in February and saw huge selling that pushed the stock down over 20%.
Two insiders, including the CEO, have combined to buy more than $1.1 million of the stock recently. The shares are trading at just 80% of asset value, and even after the dividend cut the yield is almost 10%.
Other BDCs seeing insider buying in the past month include Pennant Park (PNNT), Solar Capital (SLRC), Solar Senior Capital (SUNS), Five Oaks (OAKS), Gladstone Capital (GLAD) and Full Circle Capital (FULL). The people running these firms do not seem to share the pessimism that has surrounded the industry in recent months.
Of these, my favorite, along with Fifth Street, would be Gladstone Capital. I have invested in several Gladstone BDCs over the years and done well with them.
My final observation would be that much like the BDCs, the folks running many of the mortgage REITs do not seem too concerned about the possibility of rising rates hurting the spread they make on their investment portfolio. The executives at my M-Reits have been steady buyer of their own shares this year.
Apollo Commercial Mortgage (ARI) is one of my favorite companies in the sector. They make commercial mortgages and invest in commercial mortgage-backed securities, and other commercial real estate-related debt investments. Their relationship with global private equity and real estate investor Apollo Global management (APO) gives them an edge over competitors.
They get first look at deals other firms never see, and that is a huge advantage. The stock is trading at a discount to asset value and yields 9.1% right now. Insiders have been consistent buyers of the stock with the most recent purchase occurring this week.
I have owned shares of Invesco Capital Mortgage (IVR) since the middle of the financial crisis when it looked as if real estate would go to zero and the M-Reits would all self-destruct. They have unique relationship with the distressed mortgage part of WL Ross and Company that has helped them benefit from the recovery n real estate markets. This is one of those securities I will be quite happy to own forever. Insiders have been consistent buyers with the most recent buy happening last week. The shares are yielding over 11% and trading at 85% of asset value right now.
Insider buying in companies trading below asset value is a proven way to uncover potential long-term winners The current list is short, but there are some solid candidates for patient, value-oriented investors.
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