Insiders Hang Tough: A Dozen Stocks They Like The Most

By Michael Brush
Exclusively for InvestorIdeas.com
August 30, 2007

For the fourth week in a row, insiders continued to take down large chunks of stock during the past week. Not only that, they were buyers across the board again in technology, retail, energy, and health care.

And once again they were even buyers in many of the shunned financial names – the very names that the market milquetoasts are avoiding because of their sub prime paranoia.

This confirms what I have been arguing throughout the current credit-related panic. The fallout from sub prime is hardly big enough to take down the global economy, which had enough strength coming in to this to carry on without crumbling.

If not, the Fed will continue to step in to calm things down, to keep growth on track. The Fed has said as much in public comments.

I ran some calculations last week to show exactly how unthreatening a $200 billion loss would be to the world economy. That’s the amount that market milquetoasts estimate might be the hit from sub prime loans that go bad. Although why they even use this number is unclear to me. Fed chairman Ben Bernanke has put the loss at just north of $100 billion. He’s got a pretty good staff of economists backing him up.

But let’s use the higher number, anyway, and examine what it means in real terms, to show how that kind of loss isn’t enough to throw off growth.

• I’ll start with the top ten countries in the world – the U.S. and its biggest trading partners. Financial institutions in these countries probably hold most of the dodgy sub prime debt. These ten countries had an annual income of $33 trillion last year. A $200 billion loss is just .6% of their annual income. Now let’s put some perspective on that. To person with an annual income of $100,000, this is the equivalent of losing $600. Not good, but not a big deal.
• Now let’s look at the U.S. economy. It produced $13.2 trillion worth of goods and services last year. A $200 billion loss represents just 1.5% of that amount. That’s the equivalent of a $1,514 loss for someone earning a $100,000 a year.
• Given that the total wealth of the United States is about $70 trillion, a $200 billion loss is the equivalent of a person with a net worth of $2 million losing $5,714. That $200 billion loss is just 8% of the stock market gains in the past year.

I know these comparisons don’t offer a direct analogy. I know that a big part of the problem is that key players in the credit markets have closed their doors because they don’t know for sure which counterparties may go under due to exposure to sub prime-infected debt. One big lesson in all this is that we need better accounting and disclosure for complex derivatives.

But with the Fed on board in the effort to reduce fear, the fears will ease with time. In the meantime, a brief credit contraction won’t kill the economic momentum we had coming in to this.

The insiders keep confirming this view. Even the insiders in the financial sector. They keep telling us the market milquetoasts have it all wrong. It’s time to keep buying what they are selling. And one of the best ways to find the right names is to follow the insiders.

As usual, I’ve scanned all the stocks with big insider buying in the past week, screening out the ones where the buying is a false signal for one reason or another. Here are a dozen of the best potential buy candidates on my short list.

• In retail I like Pep Boys Manny, Moe & Jack (PBY), where James Mitarotonda at Barington Capital continues to buy. He’s one of my favorite activist investors. I also like Limited Brands (LTD) and Lenox Group (LNX).
• In technology I like Mentor Graphics (MENT).
• In energy I like Venoco (VQ) and Verasun Energy (VSE).
• In health care I like Brookdale Senior Living (BKD), USANA Health Sciences (USNA), and Emeritus (ESC).
• In financials, I see healthy insider buying at AmeriCredit (ACF), Wachovia (WB) and Centerline Holding (CHC).

The bottom line : This week showed us that the volatility will continue, as I expected. This means you can probably wait for pullbacks to pick up your favorite stocks, or any of these names if you think they fit in to your portfolio after doing more research on them.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp . InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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