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Tickers in this Article: HOV, Dell, NOVL
The new-home construction market is in the middle of one of the worst slumps in decades, yet insiders at homebuilder Hovnanian (NYSE:HOV) seem unfazed. Believe it or not, company executives scooped up large quantities of shares on the cheap earlier this month. But, is their optimism well founded, or just plain foolish? Let's have a look. (To learn about the legal and illegal forms of insider trading, see Uncovering Insider Trading.)

Dissecting recent Insider Buys
In early January, Kevork Hovnanian, the company's founder and chairman of the board, bought more than 350,000 shares at prices ranging from $5.08 to $5.45 a share.

This spate of insider buying is noteworthy for a few reasons. At 84 years of age and despite the state of the current real estate market, Hovnanian's founder, Kevork Hovnanian, purchased almost $2 million worth of stock. He continues to have a substantial amount of wealth tied up in the company. He owns over 7 million shares of the company's 62 million shares outstanding. I think his buying is good news. While else would he maintain such a huge exposure to this one stock?

A second insider buy is also quite interesting. Hovnanian board member Joseph Marengi purchased 10,000 shares at $5.02 per share earlier this month. Marengi is also a senior vice president at Dell (Nasdaq:DELL), and he has a fairly extensive background in the corporate world having also served as COO at software maker Novell (Nasdaq:NOVL). In addition, he's been on the board at Hovnanian for almost two years. In other words, he knows the business and he is obviously no dummy.

It's also important to note that the $50,000 he spent on the purchase is likely a sizable chunk of his salary. Dell's latest proxy statement does not include his compensation, but other senior vice presidents are listed as having a base salary of $500,000-600,000 per year. My assumption is that Marengi's in the same boat, and that he could have spent as much as 8-10% of his base on the stock. A fairly big vote of confidence, particularly with the new home construction market in such shambles.

Another reason why this insider buying deserves a second glance is that Hovnanian executives seem to have good timing. They wisely sold shares in the early part of 2006 when the stock was trading in the $40-50 range. Now they are buying, and my suspicion is they are likely on the mark again. (For added insight, check out When Insiders Buy, Should Investors Join Them?)

Why Now?
I can't speak for either man, but their are several tantalizing possibilities as to why they could be buying right now. They could sense the company will obtain some financing in the future, or that demand for Hovnanian homes is on the rise. They could also figure the company will improve its liquidity by selling off some of the roughly $446 million worth of land and land options held for future development or sale, it had on its balance sheet as of October.

The problem, however, is that in a liquidation or time-constrained sale of assets, I'm not sure that the common shareholder would fare overly well. After all, a huge amount of the company's land and structures are located in the northeast, which is currently bogged down with a large supply of homes for sale.

The Bottom Line
The housing market is struggling, yet insiders at Hovnanian are buying stock. Their purchases deserve a look because insiders have had good timing in the past, and because the recent run of buying comes at a time when its fundamental outlook is unclear. If the insiders are able to hit the mark again this time, investors who coattail their actions may well end up with outstanding returns.

For more on coattail investing, see Warren Buffett: How He Does It and our tutorial on Stock-picking Strategies.

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