For those of us who are among the last of the world's baseball fans, we have to endure today to get to tonight. We now have two wild card races coming down to the wire as ties on the last day of the regular season. We also need European officials to stay quiet, Dr. Doom to stay away and the day needs to pass in a calm and orderly manner.
While waiting for this evening's festivities I have spent some time looking for stocks with strong insider buying activity. Often, insiders will buy shares in companies that did not show up on my screens or that I have overlooked for one reason or another. Only one reason exists for insiders to crack open their wallets and buy stock in the companies they run: They believe that business will improve and the stock price will move higher. When I see a large purchase or a series of insider buying in a company it is useful and often profitable to take a deeper look at the stock.
SWS Group (SWS) is one company seeing a lot of insider buying and one I have mentioned previously and like for the long term. SWS has a profitable securities and brokerage business and a bank that has experienced significant loan loss problems. In July, the company raised $100 million in capital form Hilltop Holdings (HTH) and Oak Hill Capital to address issues at the bank, and principals of Hilltop and Oak Hill have joined SWS's board. Gerald Ford of Hilltop made his fortune buying and turning around distressed banks and brings valuable experience and insight to the banking side of the business.
The banking division has shown improvement. Although the bank lost $46 million for the year, it turned a profit in the fourth quarter for the first time in more than a year. Nonperforming loans and classified assets decreased on a year-over-year basis, and asset quality problems are coming under control. The additional capital raised allows the bank to continue to be classified as well capitalized under the FDIC guidelines. The retail and institutional brokerage business saw a decline in revenues, but continued to be profitable. For fiscal 2011, investment banking revenues rose 12%.
The stock is cheap at just about half of book value and about 8x the analysts' estimates for fiscal 2012 earnings. Insiders apparently agree that the stock will recover. Eight different insiders have purchased stock in the past few months, including the CFO, executive vice president and several directors. In addition to the investment by Hilltop, Gerald For has purchased shares of SWS on several occasions. It is clear that the people running the company think that better days are ahead for the company and the stock.
I suspect we will see some sort of transaction or restructuring of this company before too long. It could spin off or sell the bank as the loan portfolio continues to improve. Going private is not out of the question nor is selling the whole company to a larger securities or banking firm. Stern Agee tried to buy the company earlier this year for a price of $6.25, a 25% premium to the current stock price. There is always a chance that the firm will keep the bank and ride out the ongoing mortgage storm or sell off troubled assets to clean up the bank's balance sheet. Whatever happens, I believe the stock price will be much higher in a few years than it is currently.
Insiders are predictive, not perfect. They tend to be early and almost never buy at the absolute bottom. However, strong buying by people that run the company on a daily basis and put together the business plans is usually a good sign indicating higher prices ahead.