Investing 101: Undervalued Small Caps With Insider Buying

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When investors want to trade on the actions of those closest to the action, the best place to look is at what the insiders of the company are doing. If there is something groundbreaking happening in the company, or if they are bullish on the company's future, then insiders will start to buy shares of their own company.

This can also happen if they think the company is undervalued, and one popular metric for valuation is the price-to-earnings ratio. This ratio is calculated by taking the share price and dividing it by the earnings per share. It indicates how much investors are willing to pay for the earnings of the company. If a stock's P/E is under 20, then it is often considered undervalued.

We made a screen using this information, starting with companies that have market caps between $300 million and $2 billion. This range is considered "small cap". If a smaller company is undervalued and insiders are buying it, then it could mean that insiders think the company will be growing.


Business section: Investing ideas
Below is a list of stocks from the screen above. We started with small-cap companies with P/E ratios under 15. We went with stocks below 15 because we wanted even further undervalued companies to get the cheapest price for earnings possible.

Then we checked those names' insider trading activity for net purchasing over the last six months.

Do you think the insiders know something that we don't?

List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)

1. Kronos Worldwide (NYS: KRO) : Engages in the production and marketing of titanium dioxide pigments in North America and Europe. Market cap at $1.97B, most recent closing price at $16.33.P/E ratio at 4.96. Over the last six months, insiders were net buyers of 1,044,270 shares, which represents about 5.34% of the company's 19.57M share float.

2. Stewart Enterprises (NAS: STEI) : Provides funeral and cemetery products and services in the death care industry in the United States and Puerto Rico. Market cap at $544.27M, most recent closing price at $6.01.P/E ratio at 14.58. Over the last six months, insiders were net buyers of 871,700 shares, which represents about 1.36% of the company's 64.01M share float.

3. Cumulus Media (NAS: CMLS) : Engages in the acquisition, operation, and development of commercial radio stations in the United States. Market cap at $438.05M, most recent closing price at $2.79.P/E ratio at 7.38. Over the last six months, insiders were net buyers of 2,066,530 shares, which represents about 4.41% of the company's 46.82M share float.

4. GeoEye (NAS: GEOY) : Provides earth imagery and imagery information products, as well as image processing services to the United States and foreign government defense and intelligence organizations, domestic federal and foreign civil agencies, and commercial customers. Market cap at $427.22M, most recent closing price at $18.22.P/E ratio at 8.69. Over the last six months, insiders were net buyers of 2,794,880 shares, which represents about 22.39% of the company's 12.48M share float.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Danny Guttridge does not own any of the shares mentioned above.

At the time this article was published Motley Fool newsletter services have recommended buying shares of GeoEye. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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