Five More Stocks Insiders Like in the Current Weakness

By Michael Brush
June 01, 2006

Is it over yet?

Judging by the dramatic pullback in most stocks Tuesday, there’s still more to go on the downside for stocks – especially economically sensitive names that do worse when economic growth is lousy.

These are some of the stocks investors are selling the hardest.

Investors are concerned that economic growth is slowing, or else it is too hot which will mean central banks have to continue to raise interest rates and kill growth, anyway. You really can’t have it both ways. But market observers are in fact arguing both sides – which suggests the current market weakness is irrational.

I’m still in the camp that says there is further decent economic growth ahead. Insiders at many economically sensitive companies seem to agree because they keep buying in the current weakness. Here’s a look at five more, as a follow up to last week’s Corner on the same theme (click here).

Two energy plays

If the U.S. and global economy were really about to slow down, you’d expect energy prices to cool off. Energy company insiders aren’t buying it.

Chesapeake Energy (CHK) chairman and chief executive Aubrey McClendon plunked down $11.9 million to buy shares in his company in the current sell off. He bought shares for $28.35 to $31.15 between May 16 and May 22.

Chesapeake, the second largest independent producer of natural gas in the U.S. after Devon Energy (DVN), has spent over $7 billion during the past seven years building an impressive base of natural gas reserves. At the end of March it had enough proved reserves to support a net asset value per share of $55, assuming natural gas prices of $8 per MCF. The stock recently sold for about $30.

McClendon also has a great record as an insider. On average, his stock has gone up 55% in the six months after he buys, according to Thomson Financial. The stock has practically doubled since we first featured Chesapeake here because of strong insider buying in January 2005 (click here). McClendon’s recent buying tells me you should expect much more upside from this stock.

Insiders have also been taking advantage of the current weakness to buy more shares of Petrohawk Energy (HAWK), another oil and gas company with assets in and around Texas and Louisiana. The company has been growing rapidly through acquisition. Like Chesapeake Energy, Petrohawk has oil reserves, but it is mainly a natural gas play.

Two titanium plays

NL Industries (NL) and Titanium Metals (TIE) are part of a complex constellation of companies controlled by titanium titan Harold C. Simmons.

NL Industries, through its subsidiary CompX International, makes precision ball bearing slides, ergonomic computer support systems and tumbler locks, among other things. NL also owns a significant interest in Kronos Worldwide (KRO) which makes titanium dioxide pigments used to brighten coatings, plastics and paper.

Titanium Metals produces a variety of titanium products for aerospace, industrial and military uses.

Both companies are essentially controlled by Simmons, who owns them through a complex web of trusts and companies called Contran and Valhi (VHI).

Shares of both NL Industries and Titanium Metals are down dramatically in the current market weakness. NL is down also because it used to make lead pigments used in paint, and now it’s the target of lawsuits by people claiming personal injury from the lead.

But the weakness in these two stocks doesn’t bother Simmons. He has recently been buying shares of both NL Industries and Titanium Metals at around current levels. He’s got an excellent track record, according to Thomson Financial. Stocks he buys inside his constellation of holdings have gained anywhere from 32% to 176% six months after he buys, during the past four years.

Banking on computer systems

Shares of Jack Henry & Associates (JKHY) were hit by a double whammy in May. Not only is the overall market weak, but Jack Henry – which provides computers systems for financial institutions – missed estimates a few days before the overall market turned sour on May 11.

The stock has fallen to under $19 from above $23. Interestingly, insiders were selling just before the fall for around $23. But now a different set is buying at around $19 n the pullback.

The bottom line: If you think the economy still has life, it will pay to follow insiders in these economically sensitive names. Insiders have also been buying more in two of the stocks mentioned in last week’s Insiders Corner: GenTek (GETI) and A. Schulman (SHLM) – confirming the bullish case for both of these stocks.

Disclaimer

At the time of publication, Michael Brush had long exposure to NL Industries and Titanium Metals. 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.