This column was originally published on RealMoney on Aug. 18 at 2:30 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
The accepted wisdom is that when the market has been as bad as this one has been over the past month, investors should raise cash and build a watch list of stocks to pile into when the market finally turns up again.
That's what I've done, and my watch list now runneth over.
It's difficult to tell precisely when this market will finally give more credit to the enormous number of beaten-up, black-and-blue-and-still-bleeding value-type plays with good long-term prospects. Insiders have certainly not been shy lately to point out when they see such plays.
It's not only that the raw numbers of companies with open-market insider purchases are higher so far this year than at the same time last year. More important to me is that there are more firms than usual making it through my process for weeding out significant insider purchases from those that are mere noise.
That said, even though the longer-term fundamentals of many of the stocks that are passing my initial insider-based screening look perfectly decent, the utterly cruddy technicals of most of the stocks have made it easy for me to restrain myself from buying them right away. All of the stocks I mention below, for instance, have 50-day moving averages below their 200-day moving averages -- the so-called death cross.
Although most have traded well over the past week, it's still not obvious that these stocks will break out instead of just fading at resistance.
( SCUR) is typical of a lot of the stocks on my watch list. The share price of this security software and hardware firm reached a low of $4.82 last month, nearly 70% below highs hit just last January.
Secure recently acquired a competitor called CyberGuard, but problems closing the purchase and integrating it have hurt results for the past two quarters. Secure has had a decent history of completing small acquisitions over the years, but the CyberGuard transaction was much larger than ones the company normally undertakes. What's more, Secure also recently purchased CipherTrust. That deal is expected to close next month.
So Secure has a lot of moving parts right now, and integration of its recent buys will likely take two to three more quarters. Reported results will certainly be a bit messy during this time, and deals can also generate nasty surprises.
Insiders appear confident that their shares have bottomed out. Two execs bought nearly $325,000 worth at the beginning of August for between $5.56 to $6.21 a share. Both insiders have traded this stock well in the past, and they have increased their holdings by a decent amount with their latest buys.
So far, their trades have proved good calls -- the stock is up 16% from the lowest-priced purchase. Most analysts I talked with also think this firm will be a winner in the long run, even though they acknowledge the short-term challenges.
However, the technicals argue against buying this stock today. Due to its recent strength, Secure is now bumping up against its 50-day moving average, which itself is still firmly below its 200-day metric. Will this prove to be resistance, or a breakout point? Your answer to that question will tell you whether to follow insiders now or wait to see if you'll get a better entry point later.
Either way, though, this stock's longer-term prospects and bullish insider profile make it worth keeping an eye on.
Here's a good example of why you shouldn't get too excited too quickly about stocks with good insider buying but lousy technicals. A long-time director at
, Nicholas J. Nicholas Jr., made his largest open-market purchase ever on Aug. 3, buying 25,000 shares for $16.22 a share. Nicholas has bought and sold Boston Scientific well in the past five years, and increased his current holdings by 50% with his latest purchase. This bullish purchasing comes on the heels of buying by numerous insiders in May and February. Boston Scientific's insider profile is clearly positive.
Alas, the company has done nothing but disappoint in 2006. Nicholas' insider buying earlier in the year came when the stock was above $20. The stock is now selling for $16. I was interviewed by many financial publications in February about the insider buying that was going on then. Most of the interviewers seemed to want to conclude that insiders were finally signaling that the discount given Boston Scientific in the wake of its purchase of Guidant was excessive. Though the insider buying was nice to see, I pointed out that the little bounce the stock had managed on the insider news only brought it up to a years-long resistance line. The stock seemed to me to be in a long-term downtrend, and I suggested that insiders were likely early, which they tend to be.
Over time, however, insiders also tend to be right. Boston Scientific will likely be a good buy at some point, and I certainly appreciate insiders bringing the stock to my attention. But it still looks to be in a solid downtrend, and it only remains qualified for my watch list at this time.
About two-thirds of the nearly 60 companies on my watch list have this combination of good insider buying and reasonable long-term prospects, but less-than-stellar short-term technicals. These include
Black & Decker
A few with slightly more hopeful short-term technicals are
( MBHI) and
With the market finally showing some spunk in the last few days, after many weeks of misery, a lot investors may feel this is precisely the time to start betting on these beaten-down stocks. Fair enough. Many of the companies mentioned above have traded better than most this week. Longer-term players can certainly justify picking up shares in any or all of these firms. While I still have a lot of cash on hand as of this writing, I will be nibbling a bit myself.
I'm still not in "pile in" mode, though. While the argument that there is likely little fundamental news that will get in the way of the current momentum until third-quarter earnings prereleases in late September is a good one, that quick whipsaw at the beginning of July is still fresh in my memory.
My newsletter's recommended list still has a respectable 7.6% gain year to date. I can afford to give up a little ground to the indices before betting big-time that this rally has legs. But when I do pounce, I am spoiled for choices.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Secure Computing and CalAmp 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 held none of the stocks mentioned, although holdings can change at any time.
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.