Following large, recent insider buying is a fun way to screen for stocks. It’s not scientific, and shouldn’t be a central investment thesis, but it can be a very bullish sign. In fact, many studies have shown that stocks of companies with heavy insider buying go on to outperform the market by as much as 7%.
I’ve combed through stocks with large, recent insider purchases. Here are two that I think could have a “bull” behind the buying. To be safe, I’ve included the bear case as well for you to consider.
United States Steel Corporation (NYSE:X)
The Buy
The Bad
Like many stocks United States Steel Corporation (NYSE:X) fell hard in 2008, falling from $184 a share to about $21 a share. Unlike almost all stocks the steel maker has fallen even further from its 2009 lows, as it trades near $18 today. High operating costs, cyclical factors (steel prices, etc.), and labor union woes have led to hard times for U.S. Steel; the company actually expects to report a loss of $1.07 this year. But it’s not just the steel industry that is to blame, Nucor Corporation (NYSE:NUE) has been profitable through the tough years and actually expects to report (modest) growth this year. With Nucor trading near a 52 week high, United States Steel Corporation (NYSE:X) is clearly showing itself to be a laggard in this industry.
The Bull
The bullish case for United States Steel Corporation (NYSE:X) lies on two catalysts, a rebound in steel and the company shoring up some of its operational woes. Mr. Gerber’s buy comes at an interesting time — the company has been in labor battles, seen its costs rise and nearly every analyst has turned against it. At the same time, while U.S. Steel is publicly saying the industry won’t return to full strength until 2015, most analysts expect a steel rebound next year.
A steel rebound would lift all boats, but if you want the best of breed, Nucor Corporation (NYSE:NUE) is the pick. Nucor is expected to raise earnings from $1.85 this year, to a whopping $3.63 next year and it also pays a 3.21% dividend yield. But, while Nucor is a great company, it’s hard to think it could rally hard from here. Even if it earns $3.63 next year (which would be phenomenal growth) at a current price of $45, it looks fairly valued.
Which is why Gerber’s buy has me so interested. U.S. Steel is projected to make $1.53 next year, and $2.40 the year after. The big question is, can U.S. Steel keep the ship steady until the rebound in steel comes?
It’s no guarantee but if this company can just stay solvent, the chances are that Gerber will end up being early. Just make sure that you’re ready for a high-risk, high-reward scenario before you jump in with him.
Walter Energy, Inc. (NYSE:WLT)
The Buy
In recent weeks, five high-level directors at Walter Energy, Inc. (NYSE:WLT) have snagged up over 80,000 shares in this metallurgical coal producer. The heavy buying has made Walter one of the most heavily bought stocks amongst insiders in recent months.
The Bad
Over the past year, coal has been one of the worst producing sectors in the U.S. economy as increased regulations and record low prices of natural gas have laid a one-two punch on the energy source. Lower natural gas prices have led utilities away from coal, and every coal company has felt the pain. Walter Energy, Inc. (NYSE:WLT) certainly hasn’t been immune, the company expects to lose $1.43 per share this year.
The Bull
But there certainly is some bullish news for Walter Energy, Inc. (NYSE:WLT), and for coal. Oddly enough, both of these buys (WLT, X) have something in common beyond a poorly performing stock price. Walter Energy produces metallurgical coal, which is used to produce steel. That’s not the only use for this type of coal, but it is interesting that two of the largest insider buys in recent weeks have been related to the steel industry. If steel really is poised for a rebound Walter Energy, Inc. (NYSE:WLT) will rally, but there’s more to like about coal than that.
According to recent reports by the U.S. Department of Energy, coal still has a fairly bright future. By 2035, coal output is expected to exceed 2008 numbers (which today’s output lags), led largely by a spike in demand of over 20% in emerging markets.
With or without a spike in steel demand, the coal industry appears to make some sort of rally. Natural gas prices appear to have bottomed and are rising, and coal exports are set to rise dramatically. Walter Energy expects big growth (and real profits) over the next two years, like U.S. Steel, the big question is “can it stay solvent.” Assuming it can this is another cyclical, high-risk play that could make a lot of sense to buy right now.
Insider Buying: never bullish on its own–but it helps
You’d like to think that insiders have a better understanding of their company than we could ever hope to. But that alone isn’t reason enough for us to buy a stock. The nice thing about U.S. Steel and Walter is that they have multiple catalysts. They’re undervalued and could be primed for big gains through 2014 and beyond.
That, at least, is what the people in the know think. Do you agree?
The article Insiders Are Buying These 2 Stocks Heavily…Should You? originally appeared on Fool.com and is written by Adem Tahiri.
Adem is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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