Insiders Point to Eight More Small-Cap Stocks That Could See A January Effect Rebound

By Michael Brush
Exclusively for InvestorIdeas.com
December 31, 2007

Small-cap stocks can get hammered the worst by year-end tax loss selling because there can be so few buyers for these names – the proverbial “liquidity” problem.

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But when investors are dumping tiny stocks to realize tax losses and insiders are among the few on the other side of the equation buying – it can be a particularly good time to pick up shares.

We covered three small companies where insiders are buying shares getting punished by tax loss selling in our last Insiders Corner column.

Now here are eight more.

Charming Shoppes (CHRS)

The shares of plus size women’s clothing retailer Charming Shoppes have been crushed this year. Charming Shoppes shares have traded down to $5.20 from above $14. In other words, virtually everyone who bought it this year is now looking at losses – making Charming Shoppes a good candidate for tax loss selling followed by a January-effect bounce.

But longer term there is potential too, believes Robert Rodriguez who has a solid long-term record as a value manager at First Pacific Advisors. He thinks Charming Shoppes should be able to fix its recent style misses. It also recently got the rights to manage a web site and credit card portfolio under the brand Lane Bryant, one of its divisions. This should add to growth. Insider buying backs this view. Two insiders, including the chief executive, recently bought $384,000 worth of stock.

Dillard's (DDS)

The apparel, cosmetics and home furnishings retailer Dillard's also got hammered this year by investor concerns about a consumer spending slowdown and merchandise mishaps. The sell off has landed Dillard’s on the buy list of George Putnam at the Turnaround Letter, both for a potential January bounce and bigger gains in the medium-term. A director agrees. Warren Stephens recently bought $1.8 million worth of stock for around $17.50.

La-Z-Boy (LZB)

Furniture seller La-Z-Boy is another retailer hit hard this year – in this case by competition from cheap imports and concerns about housing sector weakness weighing on sales. “However, it still has a great brand, and the weak dollar could reduce the pressure from imports,” says Putnam. Insiders picked up $210,000 worth of stock in the past month.

Emeritus (ESC)

In the past, shares of assisted living company Emeritus have done well whenever there has been a serious round of insider buying. The stock is now off over 50% from highs earlier this year, and a little above current levels, chief executive Daniel Baty picked up $1.8 million worth of Emeritus stock.

Despite the big pullback in the stock this year, his cumulative purchases are still up 21%, according to InsiderScore.com. See what I mean about his record? I suspect his recent buying suggests anyone who follows his lead now will see solid gains, in time.

ACI Worldwide (ACIW)

Shares of ACI Worldwide fell apart in mid-December -- declining to trade recently at $19 from $25. A few points below these levels, insiders including the chief executive picked up over $487,000 worth of shares of this provider of software used in electronic payment systems. The buying suggests a margin of safety at these levels, as does the company’s $2.50 a share in cash, even if ACI Worldwide also has around the same level of debt.

Cache (CACH)

Shares of this specialty women’s apparel chain were also weak in December because of poor sales trends – which the company revealed in the form of downward guidance last Friday. At $10 a share, virtually everyone who bought this year is underwater, so it’s no surprise to see what looks like December tax loss selling. Insiders recently bought $186,000 worth of stock. The company also increased its share buyback plan last Friday. Cache has a margin of safety in the form of $3 a share in cash, and minimal debt.

Beacon Roofing Supply (BECN)

Beacon Roofing Supply claims that since 70% of the money spent on roofing work goes to repair, it shouldn’t be hurt much by economic or housing sector slowdowns. That’s been little comfort to shareholders, who have seen the stock fall to $8.50 from above $20 this year.

But at around these levels insiders recently bought $1.1 million worth of stock, according to InsiderScore.com. I can’t call the bottom of the housing sector – but I’d take those sizable purchases as a sign that investors who also buy here will have decent gains in two or three years. Beacon Roofing Supply has a price to sales ratio of just .27, but it also has a large amount of debt, or $409 million, which is nearly twice its market cap.

The bottom line: In the past two columns we have suggested eleven small-cap names where insiders are buying significant amounts of stocks that look like they are weak because of tax loss selling. These stocks could see gains right away in the coming weeks from the “January effect.” But even if they don’t, the sizable insider buying at virtually all of these stocks suggests there will be gains in the medium term.

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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