Three Insider Buying Opportunities

04/08/2010 1:00 pm EST


George Putnam

Editor, The Turnaround Letter

George Putnam III, editor of The Turnaround Letter, finds a group of tarnished names whose most knowledgeable experts—insiders—are buying in bulk.

Most of the academic research suggests that insider buying is a positive signal. For example, in his 1998 book, Investment Intelligence from Insider Trading, University of Michigan finance professor Nejat Seyhun found that from 1975 to 1995, stocks bought but not sold by insiders outperformed the market by an average of 7.5 percentage points during the 12 months following the insider purchases.

By contrast, companies with insider selling underperformed the market by 6.1 points. Most subsequent research has confirmed the value of insider trading data.

With that in mind, we looked for companies with turnaround characteristics that had also reported noteworthy insider buying in recent months. [These] stocks have generally been poor performers in recent years, but they are showing signs of improvement and have attracted significant purchases by insiders.

American Superconductor (Nasdaq: AMSC) offers a range of patent-protected products for the electric power industry. Revenues have grown strongly, and after many years of losses, the company has turned profitable. A major shareholder purchased an additional 100,000 shares in mid-March. (American Superconductor closed Wednesday above $29—Editor.)

Furniture Brands International (NYSE: FBN) is one of the largest furniture makers in the US, with prominent brands such as Broyhill, Drexel Heritage, Thomasville, and Lane. Sales plunged 30% in 2009 as a result of weak home sales and high unemployment. While these two trends will need to reverse before the company fully rebounds, management has been streamlining operations in the meantime. There was some insider buying in late 2009, and then two officers and one director stepped up more aggressively in February. (Furniture Brands closed Wednesday at $6.71—Editor.)

Legg Mason (NYSE: LM) provides investment management services to individuals and institutions. The company was riding high into 2006 when the stock hit $140. But when the company’s flagship Value Trust fund, run by Bill Miller, faltered after a 15-year streak of outperformance, Legg began to lose assets. Then it got caught in the financial system meltdown.

The company continues to experience outflows from its stock and bond funds, but Bill Miller seems to be back on his game, and Legg Mason has a wide range of other products that should help rebuild profits going forward. Since late 2009, a director (Nelson Peltz, a well-known activist) has purchased nearly three million shares, and a company executive made a substantial purchase in February. (Legg Mason closed Wednesday at $31.25—Editor.)

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In an earlier version of this column, Wednesday's closing price of American Superconductor was listed as $6.03. It actually closed above $29. The updated version reflects the correct price.
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