• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing

Look Short and Inside

Two stocks with high short interest and recent insider buying.
By TIM MELVIN Dec 11, 2014 | 05:00 PM EST
Stocks quotes in this article: CAS, TITN

During an average day, I communicate with a wide range of people to talk about stocks, markets, baseball and books. Most of them have similar value inclinations as I do, so I also talk to traders, growth folks and even the occasional arbitrageur. I have found that being aware of various approaches and viewpoints can help make me a better value investor. Last night I was talking with an old friend who primarily trades options in individual stocks and he talked at length about his success buying calls on stocks that had high short interest and recent insider buying.

I have no intention of trading short call options on anything, as the stress of having a time-dated position would drive me mad in relatively short order, but I was intrigued by the possibility of using it in a value screen. So I ran a quick screen for stocks trading below book value that have a high short interest and recent insider buying. It produces an intriguing list of stocks.

A.M. Castle & Co. (CAS) is in the metals and plastics businesses. The metals division of the company engineers and distributes alloy, aluminum, nickel, stainless steel, carbon and titanium. The plastics division distributes plastics in forms that include plate, rod, tube, clear sheet, tape, gaskets and fittings. The shorts must feel that the weak economy will keep a lid on business at the company as there are some big short-side bets against it. Almost 30% of the float is currently sold short.

So far in 2014, they have been correct, as business conditions have been difficult. Moody's recently downgraded the company. The report issued by the ratings agency noted that results have been "very weak driven by competitive market conditions, market share losses, severe winter weather, and uneven demand across key end markets, and execution issues related to branch consolidations, systems conversions and inventory management. As a result, the company's revenues have declined by about 13.5% to $990 million and its adjusted EBITDA has plunged 77% to $12 million during the LTM period ended June 2014 versus the prior year period."

So far in 2014, the stock is down more than 50%.

Insiders seem to feel that conditions will improve before much longer. CEO Scott Dolan has been a consistent buyer over the past few months with his most recent purchase just a month ago. One other officer has also been buying shares of the beaten-up stock in the past month as well. If they are right about improving conditions, the shorts could quickly get squeezed out of the stock, creating a pop in the share price. Trading at less than 80% of book value, the stock could have substantial upside once it starts moving in the right direction.

I haven't pulled the trigger on Titan Machinery (TITN) yet, but continued weakness in the stock has me close to adding it to my collection of undervalued stocks. Titan owns and operates a network of full-service agricultural and construction equipment stores in the U.S. and Europe. Lower commodity prices have hurt the agriculture segment of the business as farmers delay large capital outlays and the international segment of the business has been hurt by continued weakness across Europe.

The shorts have noticed the weakness in the business and taken advantage of the poor short-term outlook. Thirty-one percent of the float is sold short in a bet that the weakness continues and, right now, it would take more than a month's trading volume to buy back all the shares sold.

The man running the company has a different outlook for the company and the stock it seems. In September, CEO David Meyer bought an additional 90,000 shares of Titan stock for more than $1.1 million. He already owned more than 600,000 shares, so he must feel that the stock price is getting near a bottom. With Titan Machinery trading for just 71% of book value, any good news that sends shorts scrambling to buy back shares could start a long rally and big gains for the stock.

Talking to many different people with differing viewpoints during the day can open us up to ideas that we can use as long-term value-oriented investors. The idea of looking for cheap stocks, high short interest and recent insider buying appears to have substantial merit.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Melvin had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity

More from Investing

Fear and Anxiety on Wall Street

James "Rev Shark" DePorre
Aug 17, 2022 4:41 PM EDT

We've got fear of missing out and wariness that the market may keep running away to the upside.

Peabody Is Glowing Hot

Mark Sebastian
Aug 17, 2022 3:19 PM EDT

Here's how to play Peabody Energy as it looks like it could fire up over $25.

It's Hard to Say What's Cookin' at Weber, Though It Smells Like a Short Squeeze

Jonathan Heller
Aug 17, 2022 11:30 AM EDT

The grillmaker's stock has traded wildly and heavily at times, most recently this week after it posted its latest results on Monday.

Dour Day Shows Why I've Been Raising Cash Into Strength

James "Rev Shark" DePorre
Aug 17, 2022 10:44 AM EDT

I'm not aggressively bearish, but just waiting for better technical conditions.

Target Badly Misses the Mark, Which Sets It Up for a Bearish Bet

Stephen Guilfoyle
Aug 17, 2022 10:30 AM EDT

The big retailer's second-quarter results were atrocious and so is its balance sheet, which makes it a stock not to buy right now.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 02:23 PM EDT STEPHEN GUILFOYLE

    We're Cleaning Out This Retailer From the Bullpen

    Check out the latest moves in TheStreet's Stocks U...
  • 10:24 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    To Improve Your Trading and Investing, Spend More ...
  • 08:44 AM EDT PETER TCHIR

    CPI Beats Expectations, But Maybe Not the 'Whisper'?

    Slightly better-than-expected inflation across the...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login