It should be an interesting weekend. The insurgents are on a roll in Iraq right now and, so far, they are meeting very little resistance from the Iraqi military. The big question is going to be what will the U.S. do and when?
Of course, for many traders and investors, the question also is going to include some discussion about the impact on the markets. I will leave that discussion to the other guys -- I learned my lesson about predicting markets based on geopolitical conflicts back in 1991. Right before the ground attack in the first Gulf War, the consensus expected a long campaign that would send oil prices soaring and stocks falling. The whole world was long oil and short stocks. Of course, the minute the first shot was fired, oil collapsed and stocks soared.
Instead, I am focusing on finding cheap stocks that have a catalyst for price improvement over the next year or so. While I spend a lot of time vilifying stock buybacks at high valuations, I am actually a big fan when they are done below book value. I am also a big fan of insider buying -- especially when it is done at prices below book value.
I ran a screen this morning for people who run companies and who are using the company's money as well as their own to buy shares of stocks that are trading at a significant discount to book value. As with all of the value oriented screens I run these days, the list of stocks is pretty short.
There is a shrinking pool of stocks trading below book value and insiders generally tend to be buyers in declines and we simply haven't seen one of those in an extended period of time. However, there are a couple of bargain issues that are experiencing double-dip buying by long-term investors.
Property and casualty concern Donegal Group (DGICA) had a rough first quarter due to weather-related losses -- a lot other businesses in the mid-Atlantic and Midwestern regions of the country took some pretty hard hits this winter. The losses hid what was a pretty solid quarter for the company: premium growth of more than 9% on a year-over-year basis.
Management must like the company's direction because they recently hiked the dividend. They have been active buyers of their own stock in the past year and still have more than 300,000 shares authorized under the existing plan. Officers and directors have also been very active about using their own cash to buy stock. Two insiders made the most recent purchases last month. The stock trades right below book value and even yields a generous 3.6% dividend at the current price.
ESSA Bancorp (ESSA) is one of my favorite "trade of the decade" stocks and the bank is seeing some double-dip buying. The Stroudsburg, Pa. based bank fits my definition of a perfect bank stock with the price at 80% of tangible book value , the equity to assets ratio over 11 and nonperforming assets at just 1.87% of total assets.
The bank just closed an acquisition that added $219 million in assets and expanded its footprint into the Wilkes-Barre and Scranton, Pa. markets. Management repurchased 60,000 shares in the first half of the year and announced a new 5% buyback plan back in February. A director of the bank just increased his stake in the bank last week, so we are seeing double-dip buying in the stock.
A lot of smaller banks made the list as well. Many of the micro-cap banks I follow are seeing double-dip buying by officers, directors and the bank itself. These bank stocks are still very cheap. Many are trading below 80% of tangible book value in spite of strong balance sheets and loan portfolios. Insiders have been taking advantage of the opportunity to load up and the boards are prudently retiring shares at bargain levels as well. If you do not have any "trade of the decade" stocks as part of your portfolio, you should fix that.
Bargains are hard to find but, in at least a few companies, double-dip buying could be a catalyst for higher prices in 2014.