Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's David Peltier will appear on NBR Tuesday (check local listings) to profile small-cap stocks with recent insider buying.
NEW YORK ( TheStreet) -- There are several reasons why executives might sell their own company's stock, but there's generally only one reason why they buy it -- to make money. Legal insider trading is something I've followed ever since my RealMoney colleague Jonathan Moreland turned me onto it a dozen years ago.
It's difficult to argue that anyone better knows the health and near-term direction of a company's business than its executive management team. But as with any strategy one employs in fundamental analysis, I look at insider buying as part of the overall investment thesis. Insiders sometimes make losing trades too; so make sure there are other factors that could make a stock a worthy investment.
With that in mind, I've come across two small-cap names with recent insider buying that, upon further analysis, appear poised to outperform the broader stock market over the coming quarters.
Up first is Headwaters (HW), which turned up on my radar screen earlier this month when the company's chief financial officer bought 25,000 shares of the company on the open market. The firm makes building products and also improves the efficiency of fossil fuels like coal and heavy oil.Headwaters posted solid fiscal first-quarter (ended December) results back in February, where management delivered double-digit sales growth. In addition, the company recently re-financed $400 million of its debt, shaving off nearly 400 basis points of annual interest. At Monday's closing price of $5.68 a share, the stock has already gained about 25% year-to-date. Even so, the company is carrying a lot of operating momentum into 2011 and I believe that Headwater shares can continue up through $7 in the coming months. Spartech (SEH) is another name that appears attractive following some recent insider buying. At Monday's closing price of $6.96, the stock is down some 25% year-to-date; but I was intrigued to see that the firm's chief executive officer recently purchased over 36,000 shares of Spartech on the open market. The company produces various plastics and, like many of its competitors, is facing higher input costs. That said, Spartech delivered 4% year-over-year sales growth last quarter and management expects to deliver gross margin improvement throughout the year. As a result, the company's fiscal 2011 (ending October) earnings could come in around $0.35 to $0.40 a share, compared with just $0.16 a year ago.
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