When I’m looking for signals of a bottom in any sector, first and foremost will be the technicals, followed by rallies on bad news.  Long before companies get back on track financially, their stock charts will have already had a big run as most of the bad news was built in.  As a distant secondary indicator, I like to keep tabs on the insider buying habits of key executives, particularly the CFO and CEO. 

These insiders know their company better than anyone and if they’re making a large bet, there is good reason to assume the prospects for the company in the future are bright.  The financials have been beaten mercilessly here in 2008, with several big banks trading in single digits.  Who would have thought that a Wachovia (WB) would be trading under 10 or that a Washington Mutual (WM) would hit nearly $3 bucks a share.  Time will tell if those moves down were warranted, but many of these banks were well overdue for massive snap back rallies and rally they did.  Many have doubled in just 5 to 6 trading days, including banking behemoth Wachovia (WB) which despite recording record losses, job cuts and a huge dividend cut, rallied again as traders bet on "the worst is over".

Also betting big on the company is new CEO Robert Steel which took over just about a month ago to inherit a mess he must feel he can clean up.  Just hours ago, he made 3 large purchases of Wachovia stock totaling more than $10 million.  That’s one heck of a gutsy move and it will probably pay off in a few years, but I always wonder what these guys are thinking when they’re timing their trades.  I realize they aren’t technical analysts but with that kind of money on the line, maybe you should consult with one!  Your stock has doubled in little over a week.  Why not wait a few days for the short covering to diminish and the longs to lock in their profit and save yourself a few million?

At any rate, it’s a good sign for Wachovia over the long haul and financials do appear to be bottoming out, but I’m waiting for at least a 50% retracement of this move in financials to do some shopping 

Disclaimer: no position in Wachovia, but may trade it at 10 or lower.

When insiders sell stock there are a multitude of reasons, so it doesn’t necessarily indicate that there are problems ahead.  On the other hand, when insiders buy in mass quantities  there is only one reason why they would put their own cash into the company stock – they feel strongly that the stock is a good value at current levels and will rise in the future.  Nobody knows the company as well as insiders, particularly the CEO and CFO.  So, when they begin purchasing, it can often pay to follow their lead. 

That’s not to say that insiders always have great timing as illustrated by the large purchases made by General Growth Properties (GGP) CFO Freibaum Bernard beginning in May of this year.  Since pouring nearly 35 million into his company’s stock in May, he has taken a nearly 30% hit.  He has been averaging down ever since by picking up nearly 2 million worth of stock on June 8th and most recently another 8 million worth just yesterday.  Clearly, Freibaum isn’t a chart reader because if he had been he would have realized that when he picked up that 35 million worth of shares, GGP stock was breaking down right along with the entire REIT industry.  The good news for Mr. Bernard is that the stock is now hitting some fairly strong support around 45, but following his lead at this point is too risky.  Volume levels aren’t yet indicating that control has shifted from sellers to buyers en masse.

Real Time Insider Buying Data Provided By Insider Cow

Beginning in May of this year, both the CEO and COO of Chesapeake Energy (CHK), snatched up just about every available share they could find.  On May 5^th alone, both the COO and CEO bought nearly $3 million worth of shares in their company.  The very next day, they followed that up with total purchases of nearly $2 million and $1.5 million respectively.  The buying spree continued in June with the COO buying over 4 million worth and the CEO buying around 15 million.  The CEO upped the ante again in August by making several purchases totaling nearly 20 million!  On one day in September another 20 million purchase was made!  After a 3 month lull (time probably spent couting money), the insider buying by CEO Aubrey McClendon began again last week, with insider purchases totaling around $1.5 million.  The last time insiders made big purchases, it preceded a nearly 100% rise in the stock.  While a run like that again isn’t as likely this time around, the amount of insider buying clearly indicates the man running the show at Chesapeake sees more good times ahead for the stock. 

Currently it’s in the process of carving out a decent looking base and forming a handle.  Keep an eye on it for a breakout.

Donald Trump, master of self promotion, may soon have another reason to pat himself on the back with a turn around of his money losing casino operations. Providing most of the financing for the restructuring deal is Morgan Stanley and they must continue to believe that Trumps’ (“ no, I’m not calling him “the Donald”) casino operations will become profitable some day, because they have been very busy grabbing shares in the last couple weeks.  Since November 17^th, the company has picked up nearly 370K shares for a total of around 6.7 million.  In addition, one director increased his stake in the company by 20% on November 21^st. 

Note:  this is not a fundamentally superior company, but nonetheless an interesting story.. not to mention it has a  great looking stock chart (minus yesterday’s reversal from the breakout).

Insider Buying data brought to you by the good folks at:

www.insidercow.com

The insider buy alerts from InsiderCow.com were coming in fast and furious yesterday for CapitalSource (CSE) as 7 different insiders picked up more than 205 million (yes, thats million) worth of its company’s shares immediately following a secondary offering of the stock.  Whoop, scratch that.  Two more insider buy alerts came in literally just seconds ago – 2 more insiders, each purchasing nearly 4.3 million worth of stock, bringing the total to 9 different insiders for a total of nearly 214 million.

About CapitalSource

CapitalSource Inc. (CSE) is a specialized commercial finance company providing loans to small and medium-sized businesses. Capital Source provides debt financing products that it negotiates and structures on a client-specific basis, through direct interaction with the owners and senior managers of its clients. The Company has three lending businesses: Corporate Finance, Healthcare and Specialty Finance, and Structured Finance. Corporate Finance generally provides senior and mezzanine loans principally to businesses backed by private equity sponsors. Healthcare and Specialty Finance generally provides asset-based revolving lines of credit, first mortgage loans and other senior and mezzanine loans to healthcare businesses and other companies. Structured Finance generally provides asset-based lending to finance companies and commercial real estate owners.

Converting to a REIT

On September 19th, the stock shot up 20% on news that the company would convert to a REIT (real estate investment trust) on Jan 1, 2006.

Fundamentally Outstanding

CapitalSource is a company with outstanding fundamentals.  Applying my ranking system, I come up with a score of 27/30, which puts it in the top 100 stocks that I track.  Beginning in 2002, the company has posted year over year growth of 500%, 83%, 38% and 29% (est. for ’05).  Net margins are double the industry average at 28%, but they have been declining a bit in the past 2 years.  Return on equity has been rising every year for the last few years and is very good at 15%.

Technically… A Different Story

Technically, it’s been a different story.  The stock has been basing nearly the entire time since the company went public on August 7th, 2003 and the action could be characterized as sloppy.  The Relative Strength rating is poor and the stock is currently having trouble staying above the 200 day moving average despite the pop following the news of the REIT conversion.

It’s strange that the stock has basically gone nowhere since its IPO considering the kind of growth it’s posted over the last couple years.  With a PE to growth ratio of .73, perhaps its time that the stock price reflect the growth.  I’m sure the insiders making large bets feel the same way. 

On Wednesday this past week, the Chairman of the Board of American Eagle Outfitters (AEOS)turned over the couch cushions and scrounged up enough loose change to make 80 insider buy transactions of the company’s stock totaling nearly 22 million.. yes, that was just in one day!  Apparently Jay Schottenstein feels the stock is a big bargain having plummeted around 40% since August 1st. 

While I’m not one to bottom fish, I couldn’t help but thinking the same thing myself.  Top retailers like American Eagle, Abercrombie and Fitch (ANF) and bebe stores (BEBE) have simply fallen off a cliff.  Top ranked retailer Urban Outfitters (URBN) has faired much better, getting a big bounce off support of the 200 day moving average last week.  With the holidays just around the corner, maybe its time for some Christmas shopping.

It should be noted that Jay Schottenstein wasn’t the only insider to make purchases on Wednesday.  Another Director picked up more than $800K worth of his company’s shares.

                                 Data Provided By                                                   

An Insider Buying category has been added to the blog here and a  couple times a month I’ll be highlighting a company where insiders are putting their hard earned cash on the line, betting the stock will rise.  Nobody knows more about company prospects than insiders.  When they’re buying it’s a very good sign and a surging stock price is often not far behind.  Although I will typically stick to highlighting proven companies with great fundamentals, I thought I’d kick off the first insider buying post by highlighting a company that George Soros likes well enough to purchase 3 million worth of shares in.  It should also be noted that other insiders have been accumulating the stock heavily in recent months as well.

Auxilium Pharmaceuticals, Inc. is a specialty pharmaceutical company that develops and markets products for urology and sexual health. Auxiliummarkets one product through its 100-person sales and marketing organization and has three primary products in development. The Company’s marketed product, Testim, is a topical 1% testosterone gel indicated for the treatment of hypogonadism.

Their first commercial product is Testim, which is a topical gel used for the treatment of hypogonadism.  In english, that translates to men with low testosterone levels which is linked to a decrease in energy, muscle mass, bone density, libido and sexual function as well as depression.

While the company is not yet profitable and doesn’t appear to be on the brink of profitability any time soon, sales growth has been very good in the last couple years.  On the technical side, the chart looks outstanding here as it settles in at support of the 50 day moving after surging above there.

www.insidercow.com