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Stocks Seeing Selling Pressure
One of the easiest ways to get a quick, yet not always accurate, look as to whether a company's stock price is attractive or not is by observing the action of the company's insiders. Management, after all, is intimately close to the assets of their business. They know better than anyone how well those assets will perform over time.
IN PICTURES: Digging Out Of Debt In 8 Steps
Selling Blues
Despite the stock market correction in the second quarter of 2010, stocks overall are not cheap. Pockets of opportunity exist, but stock prices today are generally on high side in relation to the growth potential of the current U.S. economy. So in today's environment stocks that are experiencing heavy selling pressure may provide an indication that the stock price has gotten way ahead of intrinsic value.
Compass Diversified Holdings (Nasdaq:CODI), a $591 million diversified investment company has come under strong pressure recently. Insiders, who currently own 17.86% of the company, reduced holdings by nearly 15% over the last three months. The company trades for a premium to its assets with a book value of 1.3 and a rich 12 times EV/EBITDA ratio.
Compare this with MVC Capital (NYSE:MVC), a $375 million diversified investment company which trades for 0.75 of book value, or a 25% discount to asset valuation. MVC has very little debt and an excellent management team. Trading below the net asset value of its marketable investment holdings is clearly a more compelling proposing than a company that trades for a premium.
False Alarms
Of course not all insider selling is necessarily a sign of trouble ahead. This may be the case of Property and Casualty insurance company Endurance Specialty Holdings Ltd. (NYSE:ENH). Insiders, who currently own 1.88% of the company, reduced holdings by -29.97% over the last three months. While that is a significant reduction for any insider, they own less than 2% of the company.
Further, institutional investors have not been heading for the exits en masse. With a P/E of less than 5 and a forward P/E of less than 8, Endurance may be worth a closer look. Book value, an excellent metric to analyze when examining insurance stocks, looks attractive for Endurance. The stock price is trading for 75% of book value. (To learn more, see Digging Into Book Value).
The insurance industry on the whole is in the midst of a pricing down cycle, so the overall industry looks cheap. Of course, it's doubtful that all stocks in the industry are bargains. And not all insurers trading for book or a premium to book should be dismissed. Alleghany (NYSE:Y), currently trading for book value is considered by many to be an excellent insurance and investment company. With operating margins of over 30%, clearly the company's assets are performing very well.
One Tool in a Toolkit
Insider stock activity is an excellent tool for any investor to use. But like any tool, it's most effective when used properly and as part of an overall investors toolkit.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: Digging Out Of Debt In 8 Steps
Selling Blues
Despite the stock market correction in the second quarter of 2010, stocks overall are not cheap. Pockets of opportunity exist, but stock prices today are generally on high side in relation to the growth potential of the current U.S. economy. So in today's environment stocks that are experiencing heavy selling pressure may provide an indication that the stock price has gotten way ahead of intrinsic value.
Compass Diversified Holdings (Nasdaq:CODI), a $591 million diversified investment company has come under strong pressure recently. Insiders, who currently own 17.86% of the company, reduced holdings by nearly 15% over the last three months. The company trades for a premium to its assets with a book value of 1.3 and a rich 12 times EV/EBITDA ratio.
Compare this with MVC Capital (NYSE:MVC), a $375 million diversified investment company which trades for 0.75 of book value, or a 25% discount to asset valuation. MVC has very little debt and an excellent management team. Trading below the net asset value of its marketable investment holdings is clearly a more compelling proposing than a company that trades for a premium.
Of course not all insider selling is necessarily a sign of trouble ahead. This may be the case of Property and Casualty insurance company Endurance Specialty Holdings Ltd. (NYSE:ENH). Insiders, who currently own 1.88% of the company, reduced holdings by -29.97% over the last three months. While that is a significant reduction for any insider, they own less than 2% of the company.
Further, institutional investors have not been heading for the exits en masse. With a P/E of less than 5 and a forward P/E of less than 8, Endurance may be worth a closer look. Book value, an excellent metric to analyze when examining insurance stocks, looks attractive for Endurance. The stock price is trading for 75% of book value. (To learn more, see Digging Into Book Value).
The insurance industry on the whole is in the midst of a pricing down cycle, so the overall industry looks cheap. Of course, it's doubtful that all stocks in the industry are bargains. And not all insurers trading for book or a premium to book should be dismissed. Alleghany (NYSE:Y), currently trading for book value is considered by many to be an excellent insurance and investment company. With operating margins of over 30%, clearly the company's assets are performing very well.
One Tool in a Toolkit
Insider stock activity is an excellent tool for any investor to use. But like any tool, it's most effective when used properly and as part of an overall investors toolkit.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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