Outbid the Insiders with These Five Stocks

By Michael Brush
Exclusively for InvestorIdeas.com
March 1, 2007

The Chinese Year of the Pig just started. And the market had some roast pig on Tuesday to celebrate.

The pigs were all those who continued buying stocks in February despite the red flags portending the sharp pullback that burned them on Tuesday. We’ve been cautioning for weeks that too much bullishness and complacency suggested Tuesday’s debacle was imminent.

But now what? Is this actually the start of something big to the downside?

I don’t think so, for three reasons.

• The panic selling was sparked by a perfect storm of five negative news events in one day. The chances of that happening again are small. Think about it. There was the China stock market meltdown and a possible assassination attempt on vice president Dick Cheney. We also had negative comments on the economy from former Fed chairman Alan Greenspan, and negative economic news in the durable goods orders. Finally, near the end of the day there was a freeze-up in the electronic trading system at the New York Stock Exchange. Any one of these events would have been bad enough. Coming together, they spooked investors. But the chances of a repeat of so many negative news stories in one day are small.
• History shows that most one-day panic sell offs are good buying opportunities. When they aren’t, you know right away because the down day is followed immediately by further heavy selling. We didn’t see that on Wednesday.
• Some of the bullish sentiment went away, which is positive. Options volatility increased. So did levels of put buying (a negative bet) compared to call buying (a positive bet). Investors are now a bit more wary. So we now have more of a “wall of worry” to climb, which is good. “It's possible that one day's worth of scare was enough to wash away a lot of that attitude,” says Jason Goepfert of SentimenTrader (www.sentimentrader.com). But the jury is still out. We’ll learn more about sentiment over the next few days when updates of surveys of newsletter writers, stock advisors and individual investors come out.

So what were insiders buying during the panic sell off? Because of time lags on reporting of insider activity, it’s still too early to know. We’ll learn more on Thursday and Friday.

But here’s another useful approach. Why not scan the most interesting insider buys in the past week to find stocks where insiders – oops! – loaded up big time just before the big crash? With these stocks, you can step in now and get considerably better deals than they did just a few days ago. Here are five examples.

Consolidated Tomoka Land (CTO)

This Daytona Beach, FL-based land developer started off over a hundred years ago as a timber company harvesting yellow pine tar used on wooden ships. That helps explain its huge Florida land holdings.

Consolidated Tomoka now develops that land. But it’s also selling it off bit by bit and plowing the proceeds into properties used by stores like Best Buy (BBY) and Lowe’s (LOW). Next, it will probably borrow against those properties and take on debt to invest in more development.

Wintergreen Advisers, an activist investment shop which already owned 16% of Tomoka stock, bought another $2.2 million worth at $79.76 on Feb. 21. Then it purchased another $1.7 million worth at $79.40 on Feb. 26 – one day before the Tuesday pig roast. As of Wednesday, you could buy the stock for $3 a share less than what Wintergreen paid.

This stock is also owned by Third Avenue Management and Barington Companies Equity Partners – two other activist management shops with decent records. One more bullish angle: There is a huge short position and the shorts are getting squeezed because the stock keeps rising.

Coca-Cola (KO)

After lagging rivals for some time in new products, Coca-Cola is finally back in the game (http://articles.moneycentral.msn.com/Investing/CompanyFocus/CocaColaReadytoPop.aspx). It also benefits from a powerful global distribution reach and fizzy growth in areas like China, Russia, India, and several parts of Africa.

Despite these positives, Coca-Cola shares have been weak so far this year. But a $261,000 purchase by Glenn Jordan, president of the Pacific Group division of Coca-Cola, suggests the weakness may only be temporary. Jordan bought at around $47.50 on Feb. 20. You could have done a dollar better on Wednesday. The company also has a $13.2 billion share buyback plan in place.

Freeport-McMoRan Copper & Gold (FCX)

Freeport-McMoRan controls one of the best mines in the world. Its Grasberg mine in Indonesia has the largest single gold reserve and the second-largest copper reserve, according to Morningstar. The company recently diversified its asset base by purchasing another big mining company, Phelps Dodge.

Credit Suisse just upgraded Freeport-McMoRan – citing rising copper prices. But the brokerage thinks Freeport-McMoRan looked undervalued, even without rising copper prices. The company also has the potential to shed some debt, now that it owns Phelps Dodge.

Director Robert Day bought $17.8 million worth for $59.21 a few days before the market tanked on Tuesday. As of Wednesday, you could still get a price about $2 better than that.

Gartner (IT)

Technology just keeps getting more and more complex, and Gartner stands out as the leading publicly-traded company trying to help businesses make sense of it all.

The company – which offers research, consulting and conferences -- is in the midst of a turnaround, re-working contracts and cutting costs.

In the days before the meltdown this week James Smith, a director, bought over $2 million worth of stock, most of it at around $21.90. On Wednesday you could have purchased for 5% lower.

General Growth Properties (GGP)

With over 200 properties in 44 states, General Growth Properties is one of the biggest real estate investment trusts (REITS) in the country. This means it is diversified enough to handle regional economic weakness – a bane of smaller REITS.

The company grows by purchasing malls with cheap floating-rate debt, applying its magic to improve the malls, and then refinancing with secured fixed-rate mortgage on the more valuable properties.

The company already had high insider ownership, with the founding Bucksbaum family owning more than 20% of the company. (In an era of multi-million dollar salaries and perks, chief executive John Bucksbaum gets just $225,000 in salary, preferring instead to make his wealth through share appreciation.)

But that insider ownership got even higher on Feb. 22 when finance chief Bernard Freibaum bought $3.3 million worth of stock for an average $65.98, according to InsiderScore.com. After the Feb. 27 pig roast, you can buy shares for $2.50 a piece less than he paid.

The bottom line: Stocks usually go up after big insider purchases. But here are five where you can get them cheaper, thanks to the Tuesday pig roast.

Disclaimer
At the time of publication, Michael Brush had long exposure to Freeport-McMoRan Copper & Gold. 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/. InvestorI deas.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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