Insiders Corner: Six Months to Make a Mayor Proud
By Michael Brush
June 15th, 2005
advertisement
To mark the six-month point for Insiders Corner -- which launched in
mid-December – I’ve taken a look back at how my column has done.
Here are the highlights.
* I’m up 7.65% in the 35 stocks I’ve written about.
* That beats the NASDAQ by nine percentage points. And it’s 5.3 percentage
points better than the S&P 500 index.
* The column’s returns were better than most managed mutual funds in the
same time frame.
* Of all the stocks I recommended, 65% are up, and 37% are up more than
10%.
Two were up more than 50%. They were Parker Drilling (PKD),
an energy services company which was the very first stock in Insiders
Corner; and DexCom (DXCM),
which develops diabetes test kits.
There were losers, too -- twelve of them -- and one surprising disaster, or
Constar International (CNST).
It’s a plastic container company that was supposed to do well because a
heavy hitting insider with a good record had plowed millions of dollars into
the stock. Instead, Constar got cut in half, but I think it’s a buy here –
more in that in a moment.
Only seven of my picks lost more than 10%.
Methodology
To calculate the results, I used the opening price from the first trading
day after a column ran, and the closing price on June 15, 2005. Since I
advise readers to cut losses after a 25% decline, I used a 25% stop loss in
calculating returns. That discipline saved us further losses in only one
stock, or Constar.
Keep in mind, the results I present here may be too early to be a fair
assessment. After all, we know that insiders tend to buy early, by nature.
And the trends they buy into often take a year or more to develop. So it’s a
bit early to know exactly how the picks from the first six months of
Insiders Corner will turn out. I bet they’ll do a lot better than they
already have.
Perhaps just as important as the numbers is what we have learned about
investing with the insiders in the past six months. Here are five key
takeaways.
Underlying positive trends offer a real boost with insider signals.
Clearly any investing system works better with the wind at your back. That’s
why six of my top ten stocks were in energy production or energy services.
With oil and natural gas prices so high, these companies were bound to do
well.
Parker Drilling did the best, with 50% returns since Dec. 15, 2004. But
Chesapeake Energy (CHK),
Goodrich Petroleum (GDP)
and PetroQuest Energy (PQUE)
did well, too – with gains of anywhere from 32% to 36% since I described why
they looked like buys on January 14, 2005.
You might think these were easy calls, since energy prices have remained
high. But keep in mind that during much of this year, energy bears bailed
from the sector or shorted these stocks – arguing vociferously that energy
prices simply had to come down. They were wrong, and we were right – in part
because we stuck with the insiders and also found supply-demand trends that
made their bullishness seem rational.
Heavy hitters can swing hard and miss.
Intuitively, it makes sense to look at the track records of insiders who bet
millions of dollars – and then follow them if they have been hitting home
runs. That is what we thought about Nadar Tavakoli, a heavy hitter with a
good record who we spotted loading up on Constar, a plastic bottle maker.
So far Constar has turned out to be a bust, but here’s the twist. Our heavy
hitter Tavakoli hasn’t sold, and indeed he was buying again in March and
April during this pull back. So my hunch is Constar is a great buy down here
at $3.50.
Biotech plays have the most disparate outcomes.
This makes sense, because biotech companies often rely on results from
studies that can take years to complete. That’s a long time between news
events, which means investors get frustrated and sell. So it’s no surprise
that a biotech play, or SIGA Technologies (SIGA)
which is working on ways to combat bio-warfare pathogens like smallpox and
anthrax, is our second worst performing stock. It is down over 24%.
In contrast, Sciclone Pharmaceuticals (SCLN),
a company that is developing a treatment for Hepatitis C, is my third best
performing stock, up over 44%. It has been strong on takeover rumors denied
by the company.
Sarbanes-Oxley is meant to help shareholders. But it punishes them as
well in the small cap waters where Insiders Corner fishes.
I was at a meeting with the chairman of a small publicly-traded Internet
company this week, and it wasn’t long before the conversation turned to
Sarbanes-Oxley, the reform legislation requiring stricter audit rules. The
main gripe: Smaller companies find the costs way too burdensome.
Some small companies handle the problem by moving to the pink sheets instead
of letting Sarbox costs eat up all their earnings. This is a risk among
small cap companies I focus on.
Indeed, my fifth biggest loser, a prison company called Avalon Correctional
Services (CITY),
is off 20% largely because it moved to the pink sheets to avoid Sarbox
costs. My guess is that not much has changed in the business. So the stock
is a buy here since it is down simply because many holders were forced to
sell because Avalon moved to the pink sheets.
Importance of diversifying
I often get emails from people who are obviously looking for a quick hit in
the market. Either they like to gamble, they suffer from some compulsion, or
they are turning to the markets as a distraction from their problems.
The results of our first six months confirm that what these people like to
do – place big, concentrated bets -- is very risky behavior. Anyone making
concentrated bets on single Insider Corner picks had five opportunities to
lose 20% or more in just a few months.
As Martin Pring says in one of the best books on investing, or Investment
Psychology Explained, when you bring character flaws to the market – like
greed or a compulsion -- the market will inevitably exploit those character
flaws and take your money.
The easiest way to avoid this pitfall is to keep a well-diversified
portfolio where no single position represents more then 5% of your overall
portfolio.
The bottom line: That tactic would have made the difference between
beating the market by 9% with Insider Corner picks, or losing 20% of your
money in just a few months with any of my biggest losers.
Anyone who wants an XL file with the returns for Insiders Corner can email
me at mbrush@investorideas.com.
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.
|
|
