Insiders Flock to Five “Defensive” Plays as Economy Weakens

By Michael Brush
Exclusively for InvestorIdeas.com
February 07, 2008

When a recession looms, many investors move to “defensive” names. The logic goes something like this: Buy food companies because no matter what happens, people have to eat.

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Well, you could have applied similar logic in 2005 to another necessity of life, concluding it made sense to buy homebuilders because everyone always have to have a place to live.

That would have put you in Toll Brothers at $50, with 58% losses right now.

My point: Good investing is never as simple as finding what you think might be sustainable end-market demand. A myriad of other factors can make or break a stock -- from management and competitors, to exchange rates, suppliers and Alan Greenspan.

Nevertheless, if you insist on going for “defensive” names because you are concerned about the economy, it makes sense to go along with the insiders. There is no shortage of them buying “defensive” names.

In recent weeks insiders have been buying lots of shares in companies that do everything from sell phones and defibrillators, to agricultural chemicals and cleaning products.

Let’s take a closer look.

Note that all of these are large-cap companies – a departure for this column. But after all, there’s little point in buying a “defensive” name if its average daily volume is so small it will get knocked down in any significant downdraft.

AT&T (T)

One of the world’s largest telecom companies – and the largest in the U.S. – AT&T does everything from tethering iPhones to the rest of the world and offering high-speed Internet connections, to providing good old basic phone service and directories.

But the growth clearly comes from wireless. Driven mostly by this segment, earnings were up 16% in the most recent quarter. Despite this strength, investors hung up on AT&T shortly after it posted bullish results – in part because of comments by the company in January that some customers were falling behind in payments, presumably because the economy was weakening.

The stock slipped as low at $34 from $42 at the start of the year, and insiders took advantage of the pullback. Two directors purchased $2.6 million worth of stock at prices between $36 and $37, according to Insider-Monitor.com, a website that’s useful for investors who track insiders because it offers regular live updates of insider buying and selling for free. 

In my view, several factors make the AT&T insider purchase look like a reliable signal:

• During its recent conference call, the company reaffirmed its 2008 earnings guidance for double-digit earnings growth.
• AT&T is using its strong cash flow to repurchase stock. It plans to repurchase 400 million shares through the end of 2009. That’s about 6.6% of the shares outstanding.
• AT&T is also using its cash flow to increase dividends – by 12.7% recently, the largest increase in its history. The company has increased its dividend 23 consecutive years.

All of these factors may help explain why AT&T directors were buying. They also help explain why J.J.B. Hilliard, W.L. Lyons analyst David B. Burks has a $46 price target on the stock.

Kraft Foods (KFT)

Kraft is the largest packaged-food company in North America and the second largest in the world. It has well-known brands like Kraft, Nabisco, Oscar Mayer, Danone, and Maxwell House. Despite this powerhouse of brands, Kraft “continues to struggle with a difficult commodity cost environment as well as a turnaround effort that is entering its fifth year,” notes Morningstar (MORN) analyst Greggory Warren.

Warren thinks Kraft may soon have to resort to more drastic measures to get its stock moving – like using its strong balance sheet to fund a more aggressive share-buyback plan. Activist investors like Nelson Peltz and Carl Icahn are also on the case. Warren has a five-star rating on Kraft stock, Morningstar’s highest rating.

A director bought $900,000 worth of stock for about $29.60 on February 4, according to Insider-Monitor.com. The company also has a buyback plan in place.

Monsanto (MON)

Monsanto sells agricultural products to farmers worldwide. The company sells seed and Roundup herbicides – demand for which drove impressive performance last quarter.

But the stock has also had a good 52-week run. Reflecting growing worldwide shortages of crops due in part to demand for Ethanol which is made from corn, Monsanto stock well more than doubled last year to trade to nearly $130 a share.

Then it got knocked down to $100 in January because of fears that an economic slowdown would reduce demand and bring down Ethanol prices. In the pullback, a director bought $1 million worth of stock for about $100 per share in the middle of January.

While Monsanto should continue to benefit from growth in worldwide food demand, the company also spends heavily on research and development to create advances like seeds that are more resistant to insects and drought.

Jefferies analyst Laurence Alexander has a buy rating on the stock and a $138 price target.

Defibrillators and cleaning products

I’ve also seen significant – but less sizable -- buying recently at St. Jude Medical (STJ), which is taking market share worldwide in the implantable cardioverter defibrillator market, and Newell Rubbermaid (NWL), which sells cleaning and office products, and stuff for use around the house like tools and cookware.

A St. Jude Medical director bought $402,000 worth of stock on January 30 at $40.25. Newell Rubbermaid chief Mark Ketchum bought $235,000 worth of stock at $23.50 on February 4.

The bottom line: Going “defensive” is never as simple as it sounds. If you are going defensive, you might as well go along with the insiders.

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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