Famed money manager Peter Lynch gave us the inside scoop on how to look at insider transactions. Executives can sell their stock for any reason, he said, but they only buy for one: They think the price is going to go up!
Today, I've highlighted a handful of insiders who have made big purchases of their own company's stock in the past week. These aren't executives getting big chunks of shares from option grants. Rather, they're insiders putting their own money on the line, buying shares at market prices. I then paired that information with insights from the members of Motley Fool CAPS to see if they think the stock has the same prospects the insiders do.
Market Value of Transactions
CAPS Rating(out of 5)
Newcastle Investment (NYS: NCT)
Wesley Edens, director
R.R. Donnelley & Sons (NAS: RRD)
Thomas Johnson, director
Valhi (NYS: VHI)
Harold Simmons, chairman & CEO
Sources: finviz.com, Motley Fool CAPS.
Although following the lead of insiders can be profitable, we still recommend you do further due diligence to determine whether these stocks ought to be sold from your own portfolio -- or would make a good addition! So this isn't a list of stocks to sell or buy, but just the inside track on companies you might want to check out further.
The REIT stuff
Mortgage REIT Newcastle Investment deploys more leverage than just about any other MREIT to juice its returns, so despite investing in fairly safe agency-backed securities -- investments underwritten by the taxpayer via Fannie Mae, Freddie Mac, and Ginnie Mae -- it still carries a higher degree of risk.
American Capital Agency (NAS: AGNC) and Hatteras Financial (NYS: HTS) also use significant amounts of leverage, but at around half the amount Newcastle does, their risk profiles are not as severe. And with dividends that yield significantly more than Newcastle, investors would not be chastised for preferring the less-levered REITs.
As economic crises spread across Europe, protracted joblessness remains entrenched here, and malaise everywhere is a concern, a further collapse of the yield curve or spread is likely to affect such leveraged MREITs more acutely. Still, with the government backstop, risks of default remain low.
Notwithstanding that, Newcastle's shares have been cut in half from their 52-week highs, bringing them to a level that board member and Fortress Investment Group chairman Wesley Edens apparently thought was too low to pass up. CAPS members are also fairly bullish about its prospects, with 88% of those rating it thinking it will outperform the market. But All-Star members have hedged their bets a bit, and only two-thirds of those weighing in think it can beat the Street.
Let us know on the Newcastle Investment CAPS page whether you agree about the degree of risk, and if so, consider adding it to your watchlist first to see how well it performs.
Business-printing services provider R.R. Donnelley & Sons has been on something of a spending spree, acquiring a string of companies over the past three years that broadens and expanding the services that it offers to its customers but typically stays within its core competency. That has paid off well at times, too, such as the purchase of Bowne & Co. last year, which became accretive to earnings within the first year.
But a growth-by-acquisition strategy is one fraught with danger since it becomes increasingly more difficult to digest all the purchases. Donnelley has gone digital, too, and its virtual data rooms have put it into a competitive space against the likes of IntraLinks (NYS: IL) and others. A virtual data room is an online storage area when information is held for distribution.
An advantage it holds over its rivals, though, is its size and well-known name. CAPS member cotom8405 says that along with a strong financial position, R.R. Donnelly is still the one to beat because of its "huge industry position, still acquiring, modest debt, solid cash flow and great yield."
Follow along by adding R.R. Donnelley to the Fool's free portfolio tracker and see whether managing all these acquisitions for growth is like printing money for the company.
What a waste
Shares of waste specialist Valhi have more than doubled so far this year, but that hasn't stopped Chairman Harold Simmons from reporting big buys of large swaths of stock via the TIMET Finance Management Company, as he has been doing all year long. Indeed, in September alone, he's reported purchases of more than $12 million worth of stock. And while Valhi has been the target of those most recent purchases, other related holdings in Titanium Metals (NYS: TIE) and NL Industries have also seen big buying in several large tranches as well.
This is a pattern that has been consistent throughoutthe year. CAPS member bobbobwhite41 contends that such large purchases are serving to do little more than prop up a stock that doesn't deserve the valuation it has, even going so far as to allege "overt price manipulation ... that is unchecked by the SEC or any other gov't agency charged to oversee."
Whether the broader CAPS community agrees with that assessment is unknown, but members have assigned it a lowly one-star rating, and only 57% of the All-Stars weighing in think it will be able to beat the market indexes.
Give us your thoughts on the Valhi CAPS page on whether Simmons has an ulterior motive in buying up the stock or whether he just thinks his company can achieve higher values still. Then add the stock to your watchlist to see how it performs from here on out.
On the inside track
Following the insiders can be a path to profits, but it pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Sign up today for the completely free service, and tell us whether it's worth trading on this inside information.
At the time thisarticle was published Fool contributor Rich Duprey holds no position in any company mentioned. Check out his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Titanium Metals. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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