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Cyclical Plays on a European Rebound
By
Michael Brush
August 18, 2005
Europe economies – long in the doldrums – look like they might soon come
back. There are at least two reasons to think so.
- Interest rates are at or near historic lows – so money is a lot
cheaper for companies to borrow and invest.
- Europe’s money supply – a measure of currency and credit – has been
rising. Again, this makes it easier for companies to get investment
capital.
What’s important about both these trends is that they’ve been in place for
around a year. That’s about the time it takes for them to kick in and have
an impact on the economy.
Already, there are signs of better growth in Europe. The job markets
recently tightened two months in a row, business sentiment seems to be
improving, and orders are up in many areas on the continent.
Cyclical stocks for a rebound
The best way play a European recovery is to go is with cyclical stocks – the
ones that bounce back the most as the economic cycle improves. Throw some
insider buying and low valuations into the mix, and you have a decent chance
at picking a winner.
That’s exactly what we see at Ico (ICOC),
where insiders were buying in May and early June in substantial amounts – at
or below current levels. This company is based in Texas, but it has a lot of
exposure to Europe.
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Ico sells things like additives that go into plastic film resins used to
make items like trash bags and packaging, and polymer powders used by
companies that produce resins for manufacturing.
Ico recently went through a round of cost cutting. So it’s poised to see
profits grow rapidly if sales pick up. “There is quite a bit of operating
leverage that we can take advantage of,” says finance chief Jon Biro. The
company also has a new management group in place. And it has new products –
like specialty resigns, and compounds that turn into foam when injected into
a mould. They can be used to make surf boards, for example.
Another plastics company with some exposure to Europe and insider buying is
Spartech (SEH).
Between early June and early July, insiders bought $713,000 in the $16 to
$18 range as the stock advanced, according to Thomson Financial.
Both stocks look cheap – and they appear to be basing – after nasty sell
offs earlier this year. Ico trades for just .21 times sales while Spartech
goes for .46 times sales.
The bottom line: It’s never easy to time a rebound in cyclical stocks
– particularly when you are counting on an economic rebound in a region like
Europe, where so many investors question the prospects for recovery. But
we’ll follow the insider leads here. Because when cyclical stocks come back,
they can come back in a big way. You just don’t know when -- which is why
it’s best to buy these two with a long-term view, as with all insider signal
stocks.
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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