Whenever people get together to talk about stocks and markets the inevitable question is: "What do you think the market is going to do?" It is also one of the first questions I get whenever I meet someone and they discover that I write about stocks on Real Money. Everyone wants to know what the stock market is going to do over the next several months or year. Despite this being the most frequently asked question, it is one for which there is no clear answer.
Some people, such as Bob Byrne here on Real Money and a few others, have developed pretty good techniques for determining price movements over the next few hours, but anything longer than that is just a wild guess. I have tested and checked hundreds of so-called stock market prediction methods and found them all to be random at best and flat out wrong at worst.
After spending and losing a decent amount of money trying to predict the market, I have come to the conclusion that I cannot do it with any accuracy. And I really do not think anyone else can either. I believe such predictions should be ignored with great enthusiasm.
What I can do, however, is look for businesses that appear to be undervalued at current prices and hold them until the undervaluation is corrected. I have also found that if the top executive of a company is buying its shares then my perception of the stock being underpriced relative to value has a better chance of being correct.
I sat down this morning and ran a screen to find companies trading at a steep discount to book value and where the Chief Executive Officer is buying shares. Most CEOs already have equity participation in their companies via stock grants and options, so when they open up their checkbook and buy shares it makes a significant statement, in my opinion.
It has been a tough time for oil and gas companies, with those operating in the North American shale fields having a particularly difficult time due to excess supplies of natural gas. Swift Energy (SFY) has seen its stock price drop almost 25% in the past year and now trades at less than 50% of book value. But Swift CEO Terry Swift apparently has a high degree of confidence in the company's future as he just paid almost $220,000 to buy another 20,000 SFY shares. He already owned more than 400,000 shares, so we view this latest purchase as a vote of confidence that last quarter's production and cash flow increases will continue.
For most of its life BRT Realty (BRT) was a REIT that engaged in short-term commercial real estate lending. In 2011, however, the REIT began transforming itself into an owner of multi-family real estate. It currently owns 26 multi-family properties with an aggregate 7,610 units and has a project in Greenville, SC that should add another 360 units. BRT's strategy was well timed and appears to be working, as revenues were up 50% last quarter and adjusted funds from operations almost doubled as a result of newly added properties. Still, BRT has not yet reinstated its dividend and is way off Wall Street's radar screen. The stock is trading at just 80% of book value. CEO Jeffery Gould as well as other members of the Gould family seem to think it is a bargain, as they have been consistent buyers of the stock in the past year.
Titan Machinery (TITN) has a network of 96 North American and 16 European dealerships selling agricultural and construction equipment. It recently reported lower-than-anticipated fiscal second-quarter results and reduced its guidance for the rest of the year. However, with the stock down 25% so far in 2014, CEO David Meyer apparently thinks it has fallen far enough. Earlier this month, he spent $1.1 million to buy 90,250 shares of the company, which are trading at 80% of book value, a level similar to 2009-2010.
Predicting market direction is way above my pay grade. I am not smart enough to make that call. However, I am smart enough to realize that the CEO of any given company knows more about that company's prospects. If they are buying at bargain levels, it would be wise to investigate further.