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The Insiders Corner
By Michael Brush
Exclusively at Investorideas.com
Savvy Insiders Bet Big On Economic Rebound; What Were They Buying? posted December 19, 2008
Insider sentiment cooled off last week, but insiders continued to place compelling bets on cyclical companies – the kind that will prosper the most in an economic rebound.
These insiders seem to be sensing a turnaround isn’t too far off – because the Fed and politicians have thrown so much fire power at the economy.
Indeed many economists and market strategists now predict the economy will bottom some time this summer or during the third quarter.
If they’re right -- and if history is any guide -- that would mean stocks should start to recover in earnest during the first quarter. The reason: Stocks typically begin to come back about six months ahead of an economic turnaround.
The big bets on cyclical companies by savvy insiders in the past week might be a confirmation of this scenario – since they would be buying just ahead of the start of a rebound for their stocks.
Here’s a closer look at what they were buying.
Huntsman (HUN)
The chemical company Huntsman is now in the odd position of trading for less than the value of a lump of money it has coming from the recent settlement of a legal battle.
Last week, Huntsman settled a dispute with Apollo Management's Hexion Specialty Chemicals for payments of about $1 billion.
Hexion had agreed to buy Huntsman back in July 2007 for $6.5 billion. Then it tried to back out of the deal. Months of litigation between the two companies followed, but it ended last week when Huntsman agreed to accept $1 billion in lieu of a purchase. Huntsman says it expects to get at least $500 million before the end of 2008, with the rest paid by March 31.
Why would Huntsman now trade with a market cap of $790 million when it has $1 billion coming to it out of the legal dispute?
One big reason is that the company has $3.9 billion in debt. Now it’s not unusual for a chemical company to have a huge amount of debt. But the current environment offers a double whammy of tight credit conditions and weakened demand. Chemical company giants like E.I. DuPont de Nemours (DD) and Dow Chemical (DOW) have been busy recently announcing plant shut downs and layoffs.
So investors and analysts are concerned Huntsman may have trouble managing all that debt. Several analysts downgraded Huntsman after the settlement, adjusting price targets down to $3 – or below recent levels of $3.30 for the stock.
"Upside remains limited until the company updates operational trends, given the current soft demand environment," Jefferies & Co. analyst Laurence Alexander wrote in a note earlier this week.
Insiders, however, took the other side of the trade – and in a big way. On December 15-17 they purchased a cool $5.3 million worth of stock, in the upper $2 and lower $3 range.
Huntsman chief Peter Huntsman – who bought $1.3 million worth of the stock -- said the settlement improves his company's financial strength and takes a lot of uncertainty out of the equation. He also predicted the fourth quarter would mark the bottom for the sector. Huntsman benefits as well from declines in the prices of petroleum-based raw materials, because oil has come down so much in price.
The chemical company also has lawsuits against Credit Suisse (CS) and Deutsche Bank (DB) which were supposed to finance the Huntsman-Hexion deal. Huntsman is claiming $3 billion in damages. That case is set for trial on May 11, and Apollo has agreed to cooperate with Huntsman in the case.
Dynamex (DDMX)
Insiders didn’t bet nearly as much on the logistics company Dynamex (DDMX) in the past week, but the insiders who were buying have excellent records. Two insiders contributing to the $181,000 in purchasing last week typically see the stock go up 80% and 20% in the six months after they purchase. The company offers same-day, door-to-door delivery service in the U.S. and Canada via couriers.
Insiders bought after the company’s stock fell sharply on weak earnings news and downward guidance for next year. However, the company – whose stock trades for about $12.50 -- has almost $1 a share in cash and no debt. This suggests it can make it through the recession and come out on the other side positioned to take advantage of an economic rebound.
Delta Petroleum (DPTR)
Shares of the energy exploration and production company Delta Petroleum (DPTR) also look attractive here at around $4 a share. Late last week, an insider who sees the stock go up 95% on average in the six months after he purchases, according to Thomson Financial, bought $92,000 worth of the stock.
Energy companies have been hammered as the price of oil and natural gas have declined. Further declines may follow. But sooner or later, and economic rebound will help drive up the prices of oil and natural gas again.
The bottom line: These three companies are in the kinds of businesses that will pick up sharply in an economic rebound. Insiders buying them now seem to think that could happen later next year, and begin driving these stocks up over the next several months.
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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