Three More Bazooka Specials that Should See Healthy Bail-Out Plan Gains

By Michael Brush
Exclusively for InvestorIdeas.com
October 01, 2008

As promised, here are three more growth-sensitive cyclical names that show a lot of promise because insiders with great records have been loading up in the recent weakness.

These cyclical companies are among those hammered the most because of widespread fears that a credit crunch would lead us into the “worst economic slump since the Great Depression.”

The 5 Stocks to Own in 2010 -- Free Report!

So likewise, I’d expect them to be among the best performers as a U.S. government bail out program for the financial sector begins to roll back the gloom and doom -- and free up capacity in the credit markets so that more loans can fund growth.

I’m guessing Congress will approve a financial rescue package by the end of this week, or early next week.

Unmark to market

Meanwhile, there’s another development emerging that could be quite positive for growth prospects and cyclical stocks.

Many financial experts blame the credit crunch – essentially a contraction of the balance sheets at banks – on “mark to market” accounting. Under this system, banks and other companies have to book assets at their “market value” – as opposed to a valuation derived from internal techniques.

The problem here is that when fear takes away the bid from under credit instruments that everyone is afraid of, the “fire sale” prices for these assets in a dysfunctional market are what banks have to use when booking these instruments.

The result could be a vast understatement of assets at banks – assuming the market really does have the pricing wrong. This would, of course, unnecessarily constrict their balance sheets and their potential for lending.

Now, a movement is afoot to get the Securities and Exchange Commission (SEC) to suspend mark to market accounting. That could be huge for banks, financial stocks, and the economy and cyclical stocks – both because sentiment would shift and growth might pick up as loans pick up.

Bearish extremes are bullish

A third signal now suggests it is time to buy stocks – especially on any volatility likely to occur between now and when Washington, D.C. approves a bail out plan.

The signal: sentiment has gotten far too negative on stocks. Investor sentiment surveys show this, as do fear measures like the volatility index. Plus we learned this week that there has been a huge exodus out of stock mutual funds into cash and treasury notes.

When a contrarian sees the crowd moving so dramatically in one direction, the contrarian bets the other way.

Here are three more cyclical stocks that may give you a good opportunity to make some money doing that. These are cyclical companies where insiders with proven track records have been buying significant amounts of stock recently.

Cenveo (CVO)

As a provider of printing services, forms and envelopes used by small businesses, banks and credit card companies, Cenveo seems like a company that investors believe would get hit hard by problems in the financial sector, and an economic downturn.

So it’s no surprise that Cenveo shares have lost over 65% in the last year to trade recently below $8 a share, compared to $24 a year ago.

Down here insiders, including the CEO (the biggest buyer), the finance chief and directors, have purchased $1.1 million worth of stock. Two of the insiders have decent records in that the stock has typically advanced 7% and 11% in the six months after they purchase.

There’s little question the company is feeling the pinch. Revenues increased by 6% in the most recent quarter – but mostly because of acquisitions. The company turned in decent cash flow growth. But mainly through cost cutting – like turning waste paper into a profit center – and getting customers to pay faster.

A bail out plan for banks and other financial institutions would be a bail out for Cenveo – in that banks make up a good portion of the company’s customer base. Likewise, a shift in investor sentiment away from gloom and doom would also boost Cenveo, as a cyclical company. Printing and marketing campaigns are two areas where its customers trim back if they expect a recession is on the way. If the economy perks up, so should spending on these activities.

One thing that investors may find troubling is that Cenveo has a huge amount of debt – but this is offset by healthy cash flow.

Crown Holdings (CCK)

Crown Holdings makes beer cans and other packaging used for food and consumer goods. Revenue growth came in at a healthy 10.4% in the second quarter – but that was strength in Europe (20% growth) offsetting sluggish growth in North America, in the low single digits.

Since July Crown Holdings stock has fallen to $22 from $29, probably on concerns about signs that economic weakness has spread to Europe.

Insiders remain defiant.

• They recently bought $1.4 million worth of stock, including a $1.2 million purchase by CEO Conway John, who has an impressive track record of seeing the stock advance 55% in the six months after he buys.
• In early September the company reaffirmed projected income growth for the year of 24% to 28%.

Crown Holdings did catch a break recently as commodity prices came down and lowered input costs – though it had maintained all along it was going to be able to pass cost increases along.

The company is building new beverage can plants in Spain and Brazil, and next year it plans to build another new plant in Casablanca, Morocco.

Crown Holdings will report earnings on October 16.

CECO Environmental (CECE)

This tiny company builds and installs air pollution control products for industry – including devices that collect dust, fumes and oil mist. With heavy exposure to industry both in the U.S. and abroad, it’s no surprise that a weakening economy has hurt results. Net sales declined in the second quarter – as contracting revenue weakened.

However, a big part of the problem is that a customer for several large projects has failed to make up for what CECO Environmental says are un-reimbursed costs linked to delays by the customer due in part to strikes by its employees.

“We are still in the process of negotiating the final closeout of that contract,” chief operating officer Richard Blum said in the most recent conference call. “We feel that it should be resolved before the end of the third quarter.”

CECO Environmental is on a major acquisition spree – recently buying companies in Canada and California – which could create some lumpy performance ahead given the difficulties businesses can face in integrating new companies.

The bottom line: Cyclical stocks should do well if a financial bail out plan rolls back the doom and gloom about growth, and actually leads to improved growth as well. These three are favored by insiders as well, making them potentially attractive bail out plays.

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.

TOP