We have two days to find another 19 stocks to fill out a value-oriented income portfolio that can provide investors an alternative to traditional dividend-driven exchange traded funds that include many dangerously overpriced blue-chip stocks. I am hopeful we can fill out all the spots, but it's going to be tricky. Yield seeking and low interest rates have pushed a lot of stocks to levels where investing just doesn't make sense at current prices. There is too high a price for everything and that seems to be especially true when it comes to the search for income.
Today, we are going to dig into the insider anomaly. James Lorie and Victor Niederhoffer first noted the power of insider cluster buying in their 1968 study "Predictive and Statistical Properties of Insider Trading," following stocks with three or more insiders buying in a month. Truth be told, I was counting on this screen to give us a bunch of reasonably priced names to fill out our portfolio, but it only adds a handful of stocks. I have done this little exercise in real time, and when I started I was reasonably confident we would find 30 stocks with positive predictive characteristics, but I am less certain now.
Tronox (TROX) makes the list as the shares are trading at 1.6x book value and have a decent balance sheet. The company makes pigments used in the manufacture of paint and other coatings, and plastics and paper. Tronox also mines for the titanium mineral sands that are used in producing the pigments. Business is flat on the year as the economy continues to struggle to gain traction, but the insiders seem to be confident that conditions will improve. Three insiders have been buying the shares in the last month and the stock currently yields 5.8%, so it fits into our income portfolio. We have pretty decent company in this stock as both Joel Greenblatt and Paul Tudor Jones were buying shares in the first quarter
Whitestone Real Estate Investment Trust (WSR) owns, redevelops, repositions, leases, manages and operates community-centered properties in Texas, Arizona and Chicago. At first glance, the price to book value looks a bit high at 1.6x, but a look at the investor relations site shows the REIT has owned many of these properties for some time and they may be undervalued a bit on the balance sheet. Whitestone focuses on high-growth markets like Dallas/Fort Worth, Houston, Phoenix, San Antonio and Chicago. The portfolio consists of 64 properties and recent results have been encouraging with a 22% revenue increase. The shares yield 8.06% and insiders have been buying.
Capitala Finance (CPTA) is a business development company that makes loans to middle-market companies and is one of my favorite areas for high-yielding securities right now. As banks have backed away from riskier types of lending, an opportunity has opened up for direct lenders to the middle-market sector of the credit markets, and Capitala is well positioned to be one of the beneficiaries. Insiders have been buying in the past month and the shares currently yield 11.03%, so it's a nice, high-yielding addition to the portfolio.
Three new names are not getting us much closer to our goal, so let's look at another insider indicator that has worked well for me in the past. I have found that when either the CEO or CFO buys more than $50,000 worth of shares in the company they oversee, the stock tends to outperform over the next year.
Using this filter allows us to add a few mortgage REITs to the mix. I am generally bullish on these over the next year, as I don't think rates will change fast enough to hurt them and they have very generous dividends. Annaly Capital (NLY) yields 11.7% right now, Javelin Mortgage (JMI) pays out 14.5% and Ares Commercial Real Estate (ARCC) pays 8.5%. All have seen insider buying by at least one of the top two executives in the past month. We also add one more business development company with BlackRock Kelso Capital (BKCC), which yields 8.9%. We also add one of my favorite dividend stocks, Orchids Paper (TIS), to the portfolio with a yield of 5.94%. This company sells toilet paper and paper towels in northeast Oklahoma and also has operations in Mexico.
Using insider activity, we have added eight new stocks giving us a total of 19. Tomorrow, we will see if we can use another proven market positive anomaly to fill out a full 30-stock portfolio, and I will post a spreadsheet of the whole income portfolio.