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Three Small-cap Stocks for the Next Leg Up
By Michael Brush
Exclusively for InvestorIdeas.com
November 30, 2007
Just like during the darkest moments in the stock market last August, insiders are telling us that now would be a bad time to lose faith and sell. Insider sentiment has been particularly strong for the past three weeks – thanks to a spike in buying and a drop off in selling.
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Interestingly, one of the sectors where insiders are the most bullish is also the same one that everyone else is so worried out: financial services, according to InsiderScore.com. Could it be that fear levels about problems in the financial sector are overblown? Insiders are clearly saying they think so.
But that doesn’t mean the financial services group is now going to turn around on a dime. Insiders tend to buy early. So if you follow them into this group, you’ll need to have a multi-year time horizon. I’d also offer a word of caution: Insiders at many financial services companies were bullish earlier this year when their stocks were much higher. So in my mind, they don’t have spotless credibility right now.
Other sectors that stand out for bullish insider sentiment, according to InsiderScore.com, are healthcare, services and basic materials.
There are plenty of large-cap companies with very bullish insider sentiment right now, but since we focus on small- and micro-cap names here, let’s take a look at three of those that insiders particularly like at the moment.
Marchex (MCHX)
Marchex helps local and specialty merchants market their stuff on the Internet. Marchex offers services like “feed management” that delivers advertiser listings into search engines and shopping engines. It also offers “bid management,” which helps merchants monitor performance-based search advertising on search engines and pay-per-click networks.
The company works through a third-party distribution network of search engines, shopping engines, directories, destination sites. It also has a proprietary network of over 200,000 Web sites where it lists ads, and collects fees when users click on them or carry out a certain task
Marchex is also behind many of those pesky telemarketing calls you might get.
Last summer, the shares of this $528 million market cap company fell hard to $9, from above $16. Since then, the stock has struggled back to $12.50. Around these levels, a new vice chairman named Nicolas Hanauer has been building big exposure to the stock. Since November 15, he’s snapped up $10.6 million worth.
Besides the size of Hanauer’s purchase, his background makes this massive buying intriguing. Hanauer co-founded the online advertising firm aQuantive, which was acquired by Microsoft (MSFT) earlier this year. He was also a founding investor of Amazon (AMZN), and he served as board advisor there until 2000, according to InsiderScore.com. In short, he’s an old pro at online marketing, which adds weight to his hefty buying, as a bullish signal on this stock.
Marchex has no debt and almost a dollar a share in cash.
Cache (CACH)
Cache is a mall-based specialty apparel retailer offering two lines, Cache and Cache Luxe, targeting women age 25-45. Like many retailers, it’s been hammered this fall. The stock has traded down to $14 from above $18 in early October. It’s also way off from $26 a year ago, and trading near 52-week lows.
Down here, insiders like what they see. They bought about $196,000 worth of the shares of this tiny $220 million retailer in the middle of November. It trades for .78 times sales, before subtracting out about $3 a share in cash, which the company is using to buy back stock. Sterne, Agee & Leach analyst Margaret Whitfield has a $20 price target on the stock.
Griffon (GFF)
A tiny conglomerate called Griffon has also been hit hard, getting more than cut in half this year – in part because of exposure to the residential housing market. The company sells residential garage doors. And it has a division that installs and services garage doors, garage door openers, manufactured fireplaces, floor coverings, and cabinetry in residential housing. The company also sells sectional doors used in commercial buildings.
Down here, Griffon sells for just .24 times sales. At these levels Barington Capital Group chief James Mitarotonda, a director at Griffon, has been adding to his position. He and other insiders have purchased a hefty $1.5 million worth of stock since Nov. 20.
This $386 million market cap company also sells plastic films used in diapers and surgical products. And it has a communications systems segment that offers chips and logistical support for civilian and military communications, radar, and command and control systems.
The bottom line: These are three contrarian plays, all in sectors not expected to do well because of fears about a sharp economic slowdown. Insiders disagree, so this might be a good entry point for these stocks.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. 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.
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