George Putnam, III
The Turnaround Letter
Insider trading has been in the news a lot recently as regulators have been cracking down on the illegal use of insider information. The theory is that "insiders" - a company's key employees, lawyers, consultants, etc. - get an early look at information that can move stock prices, and they shouldn't be able to take advantage of that until it is disclosed to the public at large.
While trading on specific, undisclosed insider information is illegal, insiders are still allowed to buy and sell their company's shares as long as they report all of that trading to the SEC. And this information about trading by corporate officers and others can be useful to other investors. Just the fact that an executive is optimistic about his company's prospects can be helpful. After all, at least in theory, someone who works at a place day in and day out should have a pretty good sense of the company's prospects.
Of course, even the insiders are not always right. It's quite possible to be too close to a company, and miss some broad, negative signals. Or someone can be so loyal to their company that it clouds their thinking. For example, we've seen significant insider buying in companies just before they file for bankruptcy.
That said, most of the academic research suggests that insider buying is a positive signal. For example, in his 1998 book, Investment Intelligence from Insider Trading, University of Michigan finance professor Nejat Seyhun found that from 1975 to 1995 stocks bought but not sold by insiders outperformed the market by an average of 7.5 percentage points during the 12 months following the insider purchases. By contrast, companies with insider selling underperformed the market by 6.1 points. Most subsequent research has confirmed the value of insider trading data.
With that in mind, we looked for companies with turnaround characteristics that had also reported noteworthy insider buying in recent months. The stocks discussed below have generally been poor performers in recent years, but they are showing signs of improvement and have attracted significant purchases by insiders.
American Superconductor (AMSC: $27.85) offers a range of patented protected products for the electric power industry. Revenues have grown strongly, and after many years of losses, the company has turned profitable. A major shareholder purchased an additional 100,000 shares in mid March.
Cenveo (CVO: $8.77), a diversified printing company, had a tough year in 2009, but recent quarterly results are trending up. The company was recently able to float $400 million of new notes that helped to extend debt maturities. Several directors and officer began buying in late 2009 and stepped up their purchases in February.
Coca-Cola (KO: $54.87) is, well, Coca-Cola. They're huge and global. But Coke floundered for most of the last decade. Recent results have been better, and the decision to purchase its North American bottling operations should improve productivity. A director bought more than $8 million worth of Coke stocks in March.
Furniture Brands (FBN: $6.66) is one of the largest furniture makers in the U.S. with prominent brands such as Broyhill, Drexel Heritage, Thomasville and Lane. Sales plunged 30% in 2009 as a result of weak home sales and high unemployment. While these two trends will need to reverse before the company fully rebounds, management has been streamlining operations in the meantime. There was some insider buying in late 2009, and then two officers and one director stepped up more aggressively in February.
Keithley Instruments (KEI: $6.67) is a maker of electronic test and measurement equipment. Though small as measured by market capitalization, it has developed a reputation for quality and innovation. Management has responded to softening sales by selling non-core assets and reducing headcount. A director bought shares in late December, and the firm's founding CEO is regularly purchasing more stock.
Legg Mason (LM: $29.20) provides investment management services to individuals and institutions. The company was riding high into 2006 when the stock hit 140. But when the company's flagship Value Trust fund, run by Bill Miller, faltered after a 15-year streak of outperformance, Legg began to lose assets. Then it got caught in the financial system meltdown. The company continues to experience outflows from its stock and bond funds, but Bill Miller seems to be back on his game, and Legg Mason has a wide range of other products that should help rebuild profits going forward. Since late 2009, a director (Nelson Peltz, a well-known activist) has purchased nearly 3 million shares, and a company executive made a substantial purchase in February.
Mercer International (MERC: $5.37) is a leading global producer of wood pulp, which is used in making paper. The pulp industry has been weak over the last couple of years as worldwide paper sales have declined. With global pulp inventories at historically low levels, any uptick in demand could lead to rapid improvement in the company's results. A large shareholder added to his position by buying 350,000 shares during January and February.
Pier 1 Imports (PIR: $6.44) is the largest specialty retailer of imported home furnishing and related items in North America. In the face of stagnating sales, a new CEO was brought on board in early 2007. Under his leadership, the company cut its workforce, closed marginal stores and developed a new merchandise mix, but the positive effects were quickly overwhelmed by the economic downturn. When the consumer starts spending again, Pier 1 should be well positioned. Three executives added to their holdings in late January.
Tyco Electronics (TEL: $27.89) was spun out of Tyco International in 2007, when that company restructured after firing its scandal plagued CEO Dennis Kozlowski. The company is a global leader in high-performance electronic components for specialized industrial uses. It was hit hard by the global recession, but the company should prosper as economic conditions improve. A director acquired nearly 40,000 shares in February.
Editor's Note: George Putnam, III is editor of The Turnaround Letter, 225 Friend St., Ste. 801, Boston, MA 02114, 1 year, 12 issues, $195.
The Turnaround Letter focuses on bankruptcy and turnaround investing and is one of the most successful investment newsletters on the market today. Mr. Putnam is one of the nation's leading experts on bankruptcies and turnaround investing and his keen insight has resulted in The Turnaround Letter being ranked as the second best investment newsletter over the last 20 years with a 13.1 annualized return, according to The Hulbert Financial Digest, a service of MarketWatch which monitors the stock recommendations of 180 investment newsletters. For more information visit the website at www.turnaroundletter.com.
