All-Star Insiders Scoop Up Cyclical Plays Offering Hope For an Economic Rebound; What 7 Stocks Did They Buy?

By Michael Brush
Exclusively for InvestorIdeas.com
November 06, 2008

While most investors remain disheartened by the “greatest economic downturn since the Depression,” at least a half a dozen smart insiders with excellent records have been snapping up cyclical names on the cheap.

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Cyclical companies – in sectors like vehicles, steel and chemicals – are the kinds that do the worst headed into an economic pullback. Likewise they are among those that recover first and do the best in a recovery.

So the fact that smart insiders with great records are buying them now is a good sign. I doubt it means we are at a bottom for stocks right now, but it is a signal we could be getting close.

Indeed if you look beyond all the widespread fears about credit problems, you find an economy in which companies and consumers are still on fairly solid ground, by many measures. This suggests the economy could come back to life fairly quickly instead of remaining mired in the doldrums for years and years, as many people now seem to think.

Consider these facts, courtesy of James Paulsen who is a market strategist and economist with Wells Fargo (WFC).

• Cash flow to capital spending at companies is the highest since 1960.
• The ratio of cash assets to debt at companies outside of the banking sector is the highest in 48 years.
• Total business loan delinquencies are still near all time lows of the past 20 years.
• Cash at households and non banking companies is 70% of GDP, or virtually the highest level ever since 1950.

To be sure, we are in the midst of a sharp economic pullback. Otherwise, the following cyclical companies would not have fallen dramatically to levels were insiders see good value. But there’s a decent amount of financial soundness throughout the economy beyond the financial sector – which is now getting bailed out by the government. So a turnaround could come sooner than many people think.

Here are seven companies where insiders with great records have been buying significant amounts of stock.

Paccar (PCAR)

Paccar makes Kenworth, Peterbilt, and DAF trucks used to haul everything from petroleum and wood, to construction materials. So naturally, this is a company that gets hit hard when businesses hold off on replacing old trucks, to save money.

Paccar stock has fallen 36% this year to trade recently at $29. Down here insiders, including one with a great record, have purchased about $1.7 million worth of stock.

Paccar has cautioned about further weakness this quarter and into part of 2009. But the company also points out that a lot of customers have not purchased new trucks for two or three years. So they’re going to have to start doing so soon. “They're now getting these vehicles up to 600,000 to 800,000 miles. And frankly, that's typically the time when they turn them in,” chief Mark Pigott said in the company’s most recent conference call.

Commercial Metals (CMC)

Commercial Metals makes steel and iron products used in construction -- like reinforcing bar, beams and fence-post sections. So its stock has been hammered. It’s down 71% since June to trade recently around $11. It now trades below book value.

Down around these levels insiders with great records have purchased about $350,000 worth of stock. The company is counting on some help from expected increases in infrastructure spending in China. Cutbacks in steel production in China may also restore the supply-demand balance for steel products, says the company.

Eagle Materials (EXP)

Eagle Materials makes gypsum wallboard and cement, mainly in the United States. So it’s no surprise that investors have fled the stock. It is down 50% since start of year, to trade recently for around $18 a share. About $4 lower, a director with a great record bought $6.8 million worth of stock.

Timken (TKR)

Timken Company makes bearings and specialty steel products used in cars, trucks, trains and industry. The company has been seeing strong demand from the aerospace and defense sectors. It also has exposure to the wind energy market – most recently through a joint venture in China. But weak demand from the auto sector caused the company to slash estimates in late October. Timken stock took a hit. It’s now down 57% from highs in May, and at recent levels of around $16 it trades below book value. Around these levels, insiders with great records recently purchased shares. 

Dow Chemical (DOW) and Celanese (CE)

Both of these companies sell industrial chemicals and plastics, so their stocks have also been hit hard. Celanese trades for a trailing price earnings ratio of just 3.6, and Dow Chemical trades for just 1.3 times book value. Around current levels, insiders with excellent records have been buyers at each company.

Patriot Coal (PCX)

Patriot Coal is the third largest producer and marketer of coal in the eastern United States. Its stock is down 80% from June highs. Down here the company’s chief Richard Whiting, who has a great record, recently purchased nearly $1 million worth of stock.

The bottom line: Cyclical companies are the ones that bounce back the most when an economy recovers. Smart insiders are placing big bets that this will happen in these stocks, from here.

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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