This column was originally published on RealMoney on April 4 at12:18 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
Once more into the breach. With fears that the growing subprime catastrophe is about to upset other companies in the financial industry (if not the entire U.S. stock market and economy), insiders at several of the firms supposedly on the front line of any contagion are fighting the perception that their stocks are just so many dead men walking.
In the wake of the severe market selloff at the end of February, there was notable purchasing by executives and directors at:
- American Home Mortgage( AHM)
- CBRE Realty Finance (CBF)
- Inland Real Estate (IRC)
- IndyMac( NDE)
- American Capital Strategies (ACAS)
- JER Investors Trust( JRT)
- Bear Stearns( BSC)
And that's just for starters.
The actions of these insiders seem to indicate that fears of a subprime-triggered market meltdown are overblown, and that the attractive indicated yields on most of these securities are very real.
When asked his opinion of whether the more-than-16% indicated yield is sustainable on the punished stock of American Home Mortgage, analyst James Ackor at RBC Capital Markets quickly answers, "No." But not for the reason you might expect: "I think the stock will go up," he says firmly.
In stark contrast to high indicated yields often presaging a future reduction in payout, AHM's earnings and distribution are very likely to increase yet again in 2007, says Ackor.
Not that he thinks everything is hunky dory. He fully expects increased write-offs, reduced demand in the secondary market, higher insurance costs and a lower volume of originations to be par for the course this year for mortgage players. But Ackor calculates that these risks "should be manageable and not have a severe impact."
So it's a matter of the degree to which the impending (and fully acknowledged) negatives will actually affect earnings in the sector. And in weighing the factors, most of the industry watchers and insiders I spoke with echoed similar sentiment. To wit: Most of the financial stocks that have been hit by the subprime pin action now have the known risks more than priced in.
But how good are insiders at calling their industry? Well, I last pointed to buying in this general sector
in a column last May, when it was already a contrarian play for insiders to be buying these income plays in the face of the dual concerns of ever-higher interest rates and a slowing housing market.
The five high-yielding mortgage REIT/finance companies featured then have had total returns between 22% (for
Affordable Residential Communities
) and 52% (for
NorthStar Realty Finance
) -- and that's after most of them were knocked down pretty severely from their highs earlier this year by the growing subprime concerns.
Sure, not all of the firms mentioned in this column or the one last May have direct exposure to residential mortgages, but that's a large part of the point: For these stocks to get punished in last month's subprime-fear correction really didn't make much sense.
Take American Capital Stategies, for instance. During the month ended March 5, ACS gave up 18%. Yet its alternative asset management and specialty finance focus is worlds different from trying to get low-income clients into any old loan just to capture a fee and a usurious interest rate. With this in mind, both John Neff at William Blair and Richard Shane at Jeffries had no problems reiterating their buy ratings on ACS as investors worried themselves to the exits last month.
Of course, different niches of the finance sector aren't completely detached, and Shane recognizes that "the more insidious concern is what happens to affect the debt capital markets that finance companies need to access." Given the ideal environment that has existed for these markets for so long, "they can only get worse," he acknowledges. "But that is misleading. Even with some deterioration, the environment would still be great from an historical perspective."
So the bullish signals from insiders do appear to have fundamental support. But as we all know, there's a big difference between whether a stock
fall and whether it actually
Considering how hard financial stocks of all kinds were hit on the mere perception of vulnerability to subprime instability, betting on them now probably makes more sense for longer-term income investors than traders trying to make a quick buck. The short-term trade off of intraday lows has already come and gone, and a lot of insiders made money (so far) on it when they bought in weeks ago.
But insiders don't just buy their stocks for a quick trade. They can't, owing to the "short-swing" rules penned into the Securities Exchange Act of 1934. They have to hold any open-market purchases for at least six months.
So the longer-term opportunity to buy into these beaten-down financials is probably not over. All you have to do is get over the constant barrage of negative headlines. That's easier said than done for most investors, especially when the overall stock market is still not looking so healthy. But odds are that you should at least be nibbling at this sector.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider CBRE Realty Finance and JER Investors Trust to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Moreland was long American Capital Strategies, Bear Stearns and JER Investors Trust, although holdings can change at any time.
Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights, founder of the Web site InsiderInsights.com and the director of research at Insider Asset Management LLC. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland appreciates your feedback;
to send him an email.