"Weekly Insider Review 4/11/01"
Subscribers to our $49.95/year Member Services get this commentary on Mondays.
Last week there were 220 companies that had insiders file Form 4s with the SEC indicating purchases, and 208 indicating sales. This is a relatively bullish ratio that will help the Rolling 4-Week Average on our Insider-Based Market Indicator look a bit more optimistic. But we are hardly ready to pound the table and scream for investors to jump back into the market with both feet.
This week will be the high filing time for insiders to send their Form 4s into the SEC telling us how they acted during last month's nasty sell off. It would be great to see a large percentage more companies with insiders buying than selling, but it would have to be an immensely lopsided ratio to make us feel confidently bullish.
Over the past couple of years, a warm bullish feeling has been justified when the Rolling 4-Week Indicator has breached the mark where 50% more companies have insiders buying than selling. But just reaching this point hasn't always been the best time to sell the house and kids and buy, buy, buy.
In the Fall of 1998, for instance, the market continued down after that 50% point was passed. The indicators became progressively more bullish during that market slide, of course, and this indicated that insiders saw tremendous values in the declining shares of their companies. Correctly, as it turned out. But the fact remains that the direction of the indicators must be taken into account as well as their absolute levels.
The way we intend to use the recent behavior of our indicators is to increase the flow of money back into the market as the indicator breaches the bullish, 50% mark, but not jump in with both feet. Calling the absolute bottom of this decline is a sucker's game, and we would rather miss some upside than be bloodied further.
So, as of now, our Buy List has the fewest number of positions on it since we began offering our research in 1997. Users should read this as us being primarily in cash, waiting for our indicators to tell us the worst is over. Many of the stocks we have recently been stopped out of will likely make it back on our Buy List when the market does improve, but we are happy to take a breather on the sidelines for now. Below are stocks that had interesting insider buying activity last week. These could also make it on our Buy List in the future.
Lands End (Nyse: LE) $27.00
Retailing has been a difficult sector to analyze in recent years. Consumer spending has been quite robust, but the explosion of e-tailer web sites caused unexpected competition for the traditional players.
Lands End (NYSE: LE), which itself turned retailing on its head through the advent of its catalog business, was hit especially hard by the Internet upstarts. The company, which earned $2.00 a share in Fiscal (January) 1998, earned just $1.13 a share in Fiscal 2001. Sales didn't actually fall over that time, but heavy competition from e-tailers led to profit-sapping price wars.
That has brought the company's stock down from $80 in late 1999 to a recent $27.
But a turn looks to be at hand as management has taken a series of steps to boost profits over the next few years. And with e-tailers now heading for the exits, they'll be able to revamp the business with fewer competitive threats.
Lands End's woes stemmed, in part, from poor merchandising. That strongly impacted both gross and operating profit margins. In addition, the company mismanaged its mailing strategies. But as CSFB's Richard Baum notes, the company is now making "excellent progress in merchandising its core business, circulation strategies and infrastructure enhancements." The analyst, who rates the stock a Hold, adds that "although operating margins are still well below peak levels, implying significant upside to earnings, sustained stock outperformance is only likely once the company can demonstrate a more consistent record of earnings growth."
Barrington Research's Derek Leckow is more sanguine. His recent report titled "Back to Sustainable Sales and Earnings Growth" highlights several metrics that imply a strong turnaround. For example, he thinks that profits can grow 20% a year for this year and next-even if sales only grow by a few percentage points. He now figures the stock is poised to rise thanks to its upper-teen earnings multiple. Insiders agree, as a pair of them recently snapped up more than $1.2 million in stock on the open market.
Popular, Inc. (Nyse: BPOP) $28.75
We recently devoted a special section to regional banks. We noted a conspicuous increase in insider buying, which reminded us of a very lucrative sector play several years back. We still remain quite enamored of the sector, and especially like Popular, Inc. (Nasdaq: BPOP), which is also a play on the booming Hispanic sector.
As the recent census showed, Hispanics are becoming a major demographic force in the U.S. Hispanics numbered 22.4 million in 1990, accounting for 9% of the population. That number grew 58% during the ensuing decade to 35.3 million. Hispanics now account for roughly 13% of the population.
Popular controls 30% of the Puerto Rican banking market. But with many families spread across the map, the bank realized that it can readily serve new customers now residing in the States. As a result, Popular now has branches in six states: New York (32 branches), Illinois (21), California (16), New jersey (12), Florida (10), and Texas (5). Florida is especially noteworthy as the company has just entered the potentially large Miami market.
Shares of Popular reached $35 a few years back, thanks to the expected demographic boost. A weakening U.S. economy caused the stock to slump to $20 before a recent rebound to $28. Though the stocks now trades in line with the multiples accorded to most bank stocks, and credit quality is lackluster, investors may want to get into the stock before the next sector rally. The company's chairman and three directors already have, snapping up $900,000 worth of stock in March.
Steris Corp. (Nyse: STE) $13.50
Flat hospital spending on equipment and supplies wrecked a number of business models. A host of suppliers built out their business infrastructure in anticipation of 10-15% spending hikes in 1999 and 2000. When the growth failed to materialize, many operators were stuck with bloated expense structures that drained profits.
Steris Corp (NYSE: STE), which is the leading provider of sterilization products and services, was especially vulnerable. Sales in Fiscal (March) 2000 actually fell five percent, and per share profits sank from $1.20 a share in Fiscal 1999 to just $0.15.
As a result, shares went into freefall over the last few years. And a recent warnings that restructurings would cause further profit woes for the first half of calendar 2001 sent shares of Steris even lower. That brought formerly bearish analysts out of the woodwork, and several quickly upgraded their ratings on the stock. Salomon Smith Barney's Anne Malone was one of the upgraders on March 16, noting that "with two messy years and restructurings largely behind it, Steris is now poised to benefit from an upturn in hospital spending." She added that "new management is taking valiant steps to clean up the mess." Malone figures the stock as about 15 times calendar 2002 earnings, sells at a "noticeable discount to the med-tech group."
UBS Warburg's Charles Olsziewki has also been impressed with the efforts of new management. "The secular bottom-line growth that management is forecasting is quite a bit more robust than we believed possible," he writes. Importantly, management guidance doesn't count on strong top line growth. Instead, massive headcount reductions, coupled with other cost-saving measures should provide the bulk of the profit growth.
Insiders must be confident in their ability to effect a turnaround. The company's CEO and Treasurer recently picked up a collective $140,000 of stock.
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