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Three Safer Stocks to Buy As the Market Gets Frothier

By Michael Brush
Exclusively for InvestorIdeas.com
November 30, 2006

I don’t mean to spoil the party, but the market’s dramatic snap-back this fall is starting to look like its on shaky ground. Three things raise some concern – suggesting that the sharp but temporary pullback earlier this week could be a sign of more trouble ahead.

The number of bulls in the market – among market commentators like newsletter writers and brokerage strategists – has risen sharply of late. Bullishness is now at levels normally associated with market tops.
Confidence among “smart money” investors – as measured by SentimenTrader.com – has plummeted while “dumb money” confidence has moved up sharply. This is another troubling “contrarian” indicator which means weakness may lie ahead.
Short interest in NASDAQ stocks recently fell 5.5% compared to last month’s levels. Again, this hints that the crowd is getting into rally monkey mode.

None of this proves a huge correction lies around the corner. After all, we are in the midst of the seasonally strong November-April period. It just means its time to be more careful. “With short intensity dropping off so fast, any new long positions must be selected with care,” says Phil Erlanger of erlangerresearch.com.

Here’s my version of selecting with care: I’m going to favor insider buy names where managers are stepping up to the plate after their stocks have been trounced.

Theoretically, at least, this means these stocks will hold up better in an overall pullback – because they’ve already been compressed. Going with names like these, however, also means you have to have some patience and buy with a long-term horizon of at least a year or more.

These stocks are damaged goods, after all. So it will take time for management to either repair problems or regain credibility. Here’s a closer look at three stocks that have pulled back to levels where insiders see value.

Phoenix Footwear Group (PXG)

Phoenix Footwear sells leisure footwear and apparel for men and women. The company also makes military boots for the Department of Defense.

Phoenix Footwear shares took a nose dive in November to $3 from $5. (It traded at $6 only a few months ago in July.) The stock has suffered for at least three reasons.

Sales were weak in its Tommy Bahama Footwear, Trask and Altama divisions in the last quarter. The company predicted problems would spill over into this quarter.
There are concerns about how many more military contracts Phoenix Footwear will win.
Phoenix Footwear has lots of debt. It had $58.2 million at the end of the last quarter, compared to a market cap of around $33 million.

To top it all off, the company is actively searching for a new chief executive.

On the bright side, the current chief executive James Riedman will likely stay on as chairman after he leaves the CEO slot. Here’s another bullish thing about Riedman: He has been loading up on Phoenix Footwear stock in the recent pull back. Riedman purchased nearly $190,000 worth just under $4 in the recent carnage.

At least one sell-side analyst isn’t as sure as Riedman about the outlook for the stock. “While we believe these issues could be resolved by early 2007, we expect to remain cautious at least until we begin to see consumer response to the company’s Tommy Bahama product,” says Wedbush Morgan Securities analyst Jeff Mintz.

That’s a wise course, except it means you will miss out on a lot of the gains if things do turn around and the stock recovers a lot before that is evident – as is often the case. As always, when the analysts go up against the insiders, I’ll side with the insiders. Besides, down here, the stock looks downright cheap with a price to sales ratio of just 0.22.

Is there any guarantee that Phoenix Footwear will hit the styles again soon? Of course not. But keep in mind that sales in two of its lines, Royal Robins and Chambers, grew by a healthy 28% and 39% last quarter. So Phoenix Footwear knows how to get it right, even if it has had a hiccup in other lines. Often the best time to buy retailers is right after a fashion miss, like right now.

Caraustar Industries (CSAR)

Caraustar produces paperboard used to make gypsum wallboard, as well as cartons, cans and tubes used in packaging.

The company has its own mills so when demand slips it’s harder to cut costs, and earnings take a big hit. What’s more, gypsum wallboard makers favor their own in-house paper suppliers when hard times come. So as an external supplier, Caraustar gets hit even harder.

These factors help explain why the stock got whacked in early November, falling to $7 from $11. The stock fell after Caraustar announced a tough quarter, mainly because gypsum paper sales were off 20%.

Down at these levels, the stock is near where insiders saw value and put $250,000 into the stock in August and September. So it looks like a buy once again.

It doesn’t hurt that we’ve seen plenty of “smart money” buying (Warren Buffet) and insider buying at three of the big gypsum wallboard and building materials companies in the past few months: USG (USG), Eagle Materials (EXP) and Owens Corning (OC). This suggests that stocks in the sector, hit by a weak housing market, are trading at attractive levels.

Anthracite Capital (AHR)

Anthracite Capital invests in high-yield loans and securities backed by commercial real estate like hotels and office space. Anthracite Capital shares cracked in early November when it missed earnings because of a decline in returns at its BlackRock Diamond Fund.

The stock fell to $11 from $14.50 but has since recovered to around $12.50. Along the way, the company’s treasurer and chief operating officer bought $76,000 worth of stock at about $12. That’s not a fortune. But keep in mind these are lower-level line officers.

Here’s another bullish factor: This is also the level where Blackrock Financial Management saw value in June and August, purchasing about $420,000 worth of the stock. Anthracite is managed by BlackRock Financial Management, a huge global money manager with $400 billion in assets.

Updates

Two stocks have seen big gains since I wrote about them a few months ago: Public Storage (PSA) (http://investorideas.com/insiderscorner/Articles/060806.asp) and Goodman Global (GGL) (http://investorideas.com/insiderscorner/Articles/080306.asp). Despite these gains, insiders keep buying – suggesting it’s too early to sell.

The bottom line: I can’t call a market turn better than anyone else. But excessively bullish sentiment now suggests it’s time to be more careful. So if you want or need to deploy new money, do it with names that seem to be basing after a recent sell off. They probably have more upside if the bull market continues, and they may fall less in a sell off since they’ve already been beaten up.

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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