Five Quick Reversal Plays for a Tough Market

By Michael Brush
Exclusively for InvestorIdeas.com
March 27, 2008

One thing I like to look for with insider patterns is a quick reversal to buying after what I’d call a big wall of selling at much higher prices.

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This kind of pattern tells me two things.

First, the big wall of selling at higher prices tells me insiders at the company are sharp when it comes to timing their stock. They know how to get out at the right time.

Next, of course, the quick reversal to buying tells me the same insider culture that knew when to sell has decided the sell off in their stock has gone too far and could soon reverse. I don’t need to see the same people buying as were selling a lot higher in the past. It’s enough for me to know from all that opportune selling that there is an insider culture which knows how to time the stock.

Here’s a look at five stocks where there was a wall of insider selling, followed by a quick reversal to buying in the past week.

Nortel Networks (NT)

Since September 2006, insiders have done nothing but get out of Nortel stock with a passion. From September 2006 through last December, they dumped $2.7 million worth of stock at an average price of $22.29. (One exception was a $1 million purchase by chief executive Mike Zafirovski last summer.) At a recent price of $6.50 for Nortel, those sellers saved themselves $1.9 million in losses by my tally of insider activity presented at Thomson Financial. Those are some smart insiders!

Now, however, they’ve abruptly reversed their selling. Earlier this week, Zafirovski and Chairman Harry Pearce bought $1 million worth of the stock at around $6.30, according to Insider Monitor.

Insiders are supposedly buying into a turnaround that has been a long time coming. The company has been purportedly exercising a turnaround for nearly two years. But these things take time, and the recent reversal to buying suggests turnaround progress may soon get reflected in the share price.

CECO Environmental (CECE)

Insiders did nothing but eliminate shares of waste management company CECO Environmental between April 2006 and the end of September last year. That was an opportune time to finish up selling. The stock actually traded at a high for the year at that point, and it’s been cut in half since.

Before the stock tank, insiders had dumped over $56 million worth of the stock from April 2006 through September 28, 2007. By exiting so deftly, they neatly avoided $17.5 million in losses. Those are the kind of insiders you want to follow, and guess what. They are now buying.

Chief executive Phillip Dezwirek, who had been among the heavy sellers, picked up $270,000 worth of stock for around $6.75 recently. The stock has already advanced a dollar, but he probably bought back for a bigger gain than that.

Omrix Biopharmaceuticals (OMRI)

From October 2006 through January 2 of this year, insiders at Omrix Biopharmaceuticals dumped lots of their stock. They sold $34.6 million at an average price of $29.79. Then, disaster struck.

Between the last insider sale and this week’s price, the stock fell 58%. It dropped $10 in one day alone in early March when it reported a weak fourth quarter and the loss of a contract. By selling ahead of the disaster in the stock this year, savvy insiders saved a cool $19 million in losses, by my calculations.

Now they are buying back.

Last week chief Robert Taub, who was among the biggest sellers dumping $22.5 million worth of the stock in December 2006, purchased nearly $1 million worth for around $12.20. He’s a quick reversal artist worth following, in my opinion.

Earlier this month Citigroup (C) analyst Matthew Dodds reaffirmed his “buy” rating on the stock – citing a strong pipeline. He lowered his price target to $23 from $33. The company develops and markets biosurgical and immunotherapy products.

GFI Group (GFIG)

Between May and the end of September last year, insiders at the brokerage GFI Group dumped $10 million worth of stock at an average price of $76. The stock traded higher, but it’s fallen this year to $63. The sellers deftly avoided $1.7 million in losses. Recently insiders were purchasing back. They bought $1.8 million worth of stock in March for prices between $54 and $58.50.

Quixote (QUIX)

It’s the same story at Quixote, a tiny company that sells highway crash cushions, wireless measuring and sensing devices, weather forecasting stations, and highway radio transmitting systems. Except for two small purchases, insiders were steady sellers between June 2006 and January 2 of this year. They dumped nearly $1 million worth of stock at an average price of $19.55.

You know what happened next. Between early January and this week the stock tanked 58% to trade recently at $8. By timing their sales so accurately, they avoided $568,000 in losses. But now they are buying again, an endorsement of sorts, of an announced turnaround that will involve cost cutting and revamping business lines. Insiders recently purchased about $150,000 worth of stock for around $7.50 to $8.50.

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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