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Getting Back to Basics with Insiders
By Michael Brush
November 03, 2005
While anxiety-prone investors wasted of most of October worrying needlessly
that higher interest rates, hurricanes, and rising fuel costs would kill the
economy, manufacturing simply continued to chug along – for the 29th month
in a row.
That’s the key takeaway from the Institute for Supply Management’s (ISM)
monthly manufacturing business survey released Tuesday.
The news had influential analysts taking a fresh look at the companies that
do the dirty work of the economy -- from making agricultural equipment or
paint spray guns, to packaging containers, and the office chairs used by the
people who manage the industrial sector.
“A winning investment theme for 2006 might be to go long the back end of the
economy,” wrote Oak Associates economist and market strategist Ed Yardeni in
his daily missive to investors Wednesday. “I am upgrading industrials from
market weight to overweight.”
Yardeni expects the U.S. economy to grow 3% in 2006 and 2007. That’s enough
to support buoyant growth in basic manufacturing. “Industrials are enjoying
an export boom thanks to the prospering global economy,” he says. “I believe
that globalization explains why our industrial sector continues to be
surprisingly robust.”
Anyone tracking the insiders would have reached the same conclusion way
before the ISM or Yardeni’s comments circulated this week. One by one, as
investors punished manufacturing stocks in October for missing earnings
forecasts, insiders stepped up and bought healthy amounts of these
economically-sensitive companies that do well as long as growth remains
robust.
Here’s a quick look at some of the highlights.
* Shares of HNI (HNI)
– which makes office furniture and gas and wood-burning fireplaces – got
pummeled in October when the company missed earnings estimates. But top
execs at the company, including the head honcho, the finance chief and a
director, took advantage of the weakness to buy shares in the $47 range.
Since then, the stock has edged back up closer to $50. Because insiders are
investors – not traders – you can expect more gains ahead.
* The harvest season was also a bad time for AGCO (AG)
– which makes agricultural equipment. The stock slipped from to $15 from
north of $20 on worries about the economy. Down at $15, the company’s chief
executive scooped up nearly a half million dollars worth of shares. Clearly
he doesn’t think we are on the brink of the next recession.
* Graco (GGG)
makes gear that applies industrial fluids used to lubricate, coat, seal, or
glue parts on vehicles and other equipment. Like many other manufacturing
companies, Graco got punished this fall as investors worried about economic
growth and Graco’s earnings potential. Insiders don’t seem to be as
concerned. They stepped up and bought over a quarter million dollars worth
of stock at around $32, after the stock fell from $37.
* Owens-Illinois (OI)
was another manufacturing company trashed this fall. The stock fell to $18
from $27. But insiders at this company -- which makes glass and plastic
containers and packaging -- don’t seem to share the concerns of investors.
They bought heavily between $18 and $19.
* Caterpillar (CAT),
a maker of construction and mining equipment, also got sold heavily this
fall. Investors pushed it down to below $50 from above $60. Insiders don’t
share their worries. One director bought over $7 million worth of the stock
in the $50 range in late October, according to Thomson Financial.
Insiders, of course, aren’t always right. But when you see a group of them
step up and take the other side of the trade while investors lose their
heads over fears of a economic slowdown, it’s worth following their lead.
When might the good times end for these kinds of stocks? Yardeni doesn’t
expect a recession until after the Olympics in China in 2008. Like many
economists, he thinks big spending in China to prepare the country for the
historic games is one of the factors driving Chinese growth – and global
growth.
The bottom line: It’s hard to believe that growth for U.S. manufacturing
companies is linked to the Chinese Olympics. But even if these economists
are right about that, there’s still another two years of decent expansion
ahead for these kinds of industrial companies where insiders recently went
on a shopping spree.
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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