Tuesday's column sparked some pretty interesting conversations around here. I am a deep-value trader, and in my experience, attempts to trade short-term developments in the market are futile for most of us, but I do count several traders among my friends and acquaintances.
We had several discussions around the idea of building a trading list that does not include the favorites of the day. As always happens, one of the chief concerns about using the less popular stocks is this mysterious concern for liquidity. I do not know any retail traders who need to trade more than a few thousand shares at a time, at most, so having a bid and offer that is good for hundreds of thousands of shares strikes me as an unnecessary requirement.
It just makes sense to me that if I am trying to trade in a time frame longer than a few minutes, then I if I do things no one else is doing, I eliminate much of the competition and increase my chances of a profit. Anyone who is going to and try to time weekly or monthly moves in the stock market should know that the odds are stacked against them. You should do anything you can to move the odds back in your favor.
I talked a little bit about insider buying on Tuesday, pointing out that stocks with insider buying have a tendency to move higher over the next year. My own research indicates that if you restrict the list to just those companies whose top two officers, the CEO and CFO, make large open-market purchases of their stock, you significantly increase your chances of success. These stocks have a marked tendency to go higher over the next six to 12 months, and they tend to go up at more than double the rate of the market. As a trader, why wouldn't you want your statistical or technical buy setup criteria to produce a list of stocks where the odds are in your favor?
Look at Hornbeck Offshore (HOS). The company owns and operates a fleet of offshore supply vessels and multi-support vessels. The fleet serves the deep-well, deep-water, and ultra-deep-water exploration-and-production companies. Insiders, including CEO Todd Hornbeck, his brother Larry, a director of the firm, and Chief Operating Officer Carl Anessa have been buying the stock in the past few weeks. I am fond of the energy sector right now, but I am not a short-term or intermediate-term trader, so I sought advice from one of the best traders I know.
Our own Bob Byrne took a look at the chart of Hornbeck. He told me that although he believes there is some concern because the long-term 200-day moving average is trending down, he says it is worth buying on a pullback to $42.50, as the 50-day moving average has turned higher, suggesting the trend is improving.
Global Brass and Copper (BRSS) is an intriguing company. It makes specialized copper and brass products that are used in housing, munitions, transportation, electronics components, coinage and industrial markets. In the past month, CEO John Wasz, CFO Robert Micchelli, General Counsel Scott Hamilton and Corporate Controller Paul Schwind have been buying shares in the open market. A positive story in Barron's last week pointed out that the stock trades at an enterprise-value-to-EBITDA ratio of just 6, so the stock appears cheap on that basis.
Again, I am not much of a chart reader, so I asked Bob what he thinks of the chart.
Bob said that since the stock is currently at $16.12, Global Brass and Copper is sort of interesting but not ready to be bought quite yet. I like it above $16.75, again, preferably on a weekly closing basis.
These are two examples of taking the road less traveled and looking to trade stocks that have insider buying by the top two executives. Bob Byrne is one of the better traders I have known over the years, and he was able to quickly apply his tools and provide trade setups for both stocks. The total list of stocks with open-market buying by at least one of the top two executives in the past 30 days numbers 81 stocks. Traders should be able to find several ides that are immediately actionable and plenty of others that have attractive setups for future trades.
If you continue to trade and invest in exactly the same stocks in exactly the same manner as everyone else, you will achieve pretty much the same results as everyone else. Since most traders fail and the majority of individual investors underperform badly, I cannot imagine why that would be a desirable outcome. Dare to be different and increase your odds of success.