As stocks have risen some 8% off the lows during the past week, I have continued to be impressed by the insider buying I have seen. Corporate officers and directors have shown increasing confidence in the future of their companies and prices of their stocks. They have expressed their confidence in the most convincing manner possible. Thy have broken into their wallets and produced cash to invest in the shares of their own stock. Insider selling can occur for a wide range of reason but buying is for one reason only. Those in the best position to determine the likely path of the stock price believe it is going higher and are investing in the stock.
I find it interesting that the hotel sector has seen some particularly strong buying in the past week. Although the prices paid for some of the premier properties has been impressive, the hotel business in general is still struggling to recover as the economy remains tepid. In spite of this, executives at some of the smaller REITs have been snapping up shares of their companies.
An old favorite, Sunstone Hotel Investors (SHO) is among the hotel real-estate investment trusts (REITs) that has seen impressive insider activity in the past few months. Executives including the company president and CFO have snapped up 130,000 shares in the past three months. The company has undergone some management changes this year and appears to be turning the corner. Funds from operations, revenue per room and earnings all improved last quarter on a year-over-year basis, and Sunstone is once again running in the black. The company currently has 32 hotels with more than 13,000 rooms available.
The stock is pretty cheap at current prices. Sunstone trades at 60% of tangible book value and a little more than 3x the projected full-year 2011 earnings before interest, taxes, depreciation and amortization (EBITDA) guidance issued by management. Sunstone has $3.2 billion of assets and total debt of $1.7 billion. Right now, the company reports more than $200 million and is planning to use a portion of it to pay down the mortgage in its Times Square property. I have owned this stock before with profitable results and I think you can buy it again at current levels along with the insiders.
Insiders at Ashford Hospitality Trust (AHT) , including the president and CEO have also been purchasing shares on the open market recently. In the past three months, insiders have bought over $800,000 worth of stock and in the past 12 months the buying totals over $8 million. These executives have been financially savvy in their management of the hotel REIT during the recent recession; hopefully, they have been as astute in their stock purchases. This company has refinanced and extended most of its debt and management has bought back almost half of their stock during the recent downturn. They have done a brilliant job of managing both the hotel business and the company's capital structure. In June, the company did an equity offering of $87.5 million and used the funds to pay off all remaining recourse debt. At 60% of tangible book value, I think this stock can also be bought at current levels for outsized long-term returns.
Insider buying has proven to be a powerful predictor of future stock prices. Clusters of buying by top executives in sectors that have been extremely weak is often a good indication that a turn is near and it is time to buy stocks in the group. This is clearly the case of some of the battered hotel real estate investment trusts. I will be buying both of these after publication.
Special Note: As my neighbors are I on day four of no power or Internet connectivity thanks to our good friend Irene, I want to thank my friends at Rams Head Shore House in Stevensville, Md. for not only providing a great breakfast but also for allowing me to monopolize a booth for long enough to get a little work done this week.