There is an enormous amount of noise surrounding the markets right now. Everyone has an opinion about what will happen under a Trump presidency, and they are all pretty sure it is going to be an investment nirvana. Most of the folks I have spoken with the past few weeks are also pretty sure they know exactly what the Fed will do in 2017. Of course, these are pretty much the same folks who, at this time last year, were pretty sure the Fed would raise rates four times, Hillary would gain the White House in a cakewalk and Donald Trump would be out of the race early, so I take it all with a grain of salt.
No one knows what the market is going to do next year. At this point we do not know which legislation Mr. Trump and his team will focus on in the early days of his administration nor do we know exactly how the market will respond. We have no idea what geopolitical events may take place to derail all the enthusiasm. Things may work out the way the bulls are thinking, and then again they may not.
Rather than get caught up in the noise game I sat down last night and ran a screen for significant insider buying in the past month. There is only one reason an insider will get his checkbook and buy shares in the company he helps control. These people believe that their company will perform well and the stock will go higher over time. They also think they are paying a good price that offers the opportunity of significant long-term profits.
I have done very well following insider buying over the years, but if you adopt this approach to finding stocks you have to keep in mind that most corporate officers and directors who buy shares in their company have a much longer time frame than most individual investors.
American Homes 4 Rent (AMH) is one of the largest owners of the single-family rental real estate. They have 48,153 single-family properties in selected submarkets in 22 states. Business is pretty good as total revenues increased 36.8% largely as a result of the purchase of American Residential Properties, which was completed this year. Director Tamara Gustavson purchased $3.3 million of shares in December to follow up on her $1.6 million buy in November. Her father, Wayne Hughes, founder of Public Storage (PSA) , is also a director and purchased almost $15 million of stock back in early November.
Newcastle Investment (NCT) is an interesting situation. After restructuring themselves after almost going under during the credit crisis the company focused on finding large and mispriced markets where they could make large investments. It has worked pretty well as they have spun off three businesses since then, New Residential (NRZ) , New Media (NEWM) and New Senior (SNR) and delivered an average return to shareholders of 31% a year. Now they are changing their focus again to pursue what they see as a major opportunity.
Back in 2006, they made a mezzanine debt investment in American Golf and in 2013 that debt was restructured and Newcastle ended up owning American Golf outright. The business currently owns 84 properties across 13 states. The company is getting out of the debt investing business entirely and expects to have that fully monetized in the near future and will focus on the golf and leisure business They plan to open a new business, Drive Shack, to leverage their knowledge of the golf industry to develop three-story combination indoor/outdoor driving ranges with full-service restaurants and bars. The first location will open in Orlando sometime in the next year and management is developing a pipeline of additional locations
As part of the plan, they intend to give up their REIT status and become a C corporation. This will allow Newcastle to use the estimated $160 million net operating losses they have on the books to offset future earnings. The golf industry has been in a state of decline for a few years, but it appears to be at least stabilizing, and Newcastle feels like they can see modest growth from the core golf business and higher growth rates from the new Drive Shack operations.
At least one director likes the plans for the future. Wesley Eden's is the CEO of Fortress Investments (FIG) , and a division of his company is the manager of Newcastle. Last week he purchased a little over $9 million worth of Newcastle stock, so he clearly has faith in the gold and leisure focus.
Tracking insiders is a better use of my time than trying to play the guessing game about what might happen next year.