Newsletter April 24, 2004
INVESTORSFRIEND INC. NEWSLETTER APRIL 24, 2004
Now that Canada finally has an internet based system to report and view insider treading transactions, you might want to take a quick look before buying any stock. Here is the link:
The reports go back to June of 2003 in most cases, but I would focus on the last 4 months or so.
A few things to keep in mind regarding insider trading:
Insider Trading is not illegal. It only becomes illegal if the insider trades on material inside information that has not been released to the public. For example if an insider sells shares just before the company issues major bad news that is illegal. However, this is a bit of a farce because insiders always have some inside information. But usually their knowledge is not considered to be “material”. I don’t mind insider trading since it gives the public a signal as to what insiders think of the share price.
Some types of trades mean more than others. Purchases “under a plan” are regular monthly purchases that may even be paid for by the company. These don’t really tell you anything about whether management thinks the stock is a buy or not since they are just buying a certain amount each month.
Purchases or sales “in the open market” are transactions that can indicate if insiders think the stock is good value or not.
Transfers by gift or similar transactions do not mean much.
Sales by insiders are generally a negative signal. However if it’s only one insider selling and if they still hold a large amount of shares after the sale then it may not mean too much. In some cases insiders have a huge amount of their net worth tied up in the company and if their salaries are not huge it is understandable that they might want to access some of their wealth.
Purchases in the open market by insiders is definitely a positive signal. The only caution there is that there may be cases where management requires executives to own a certain amount of shares so in that case it would not mean as much.
Often you will see shares acquired through the exercise of options and this is often quickly followed by the sale of some or all of the options. It is possible that the options were about to expire and therefore the acquisition of shares in this manner is not much of a signal. I find it to be a mildly negative signal when they turn around and sell all of the acquired shares. They generally do sell some to raise the money to pay for the acquired shares and to pay income taxes. But when they sell all of the acquired shares, that does seem negative. But it seems to be almost standard practice to turn around and sell all of the shares acquired from options and so I don’t view this as negatively as I view sales of shares that were held for a longer term.
Purchases of shares by the “issuer” is the company buying its own stock. This is generally a mildly positive signal although not always. (Delusional management might be willing to use company funds to buy back shares even when the share price is no bargain).
In most cases you will not see any insider trading during the period in which a quarter or year has ended but the earnings have not yet been released. I understand that most companies impose a “blackout” period at times like that to avoid charges of illegal insider trading since insiders may know what the profit and sales were before the numbers are released. Similarly if the company is in negotiation to acquire another company or be acquired itself then there would likely be a blackout period.
Recent Successful Stock Picks
Some of the stocks that I have done well with since the beginning of this year are:
A sports bar restaurant chain that is up 66%. A Canadian general insurance company that is up 19%. A Canadian life insurance company that is up 27%.
While I view the market as risky there still seems to be at least a few areas that look like bargains. In the long run the Financial Services sector always seems to do well. Right now I particularly like the general insurance sector due to recent price increases and improved profitability.
I don’t cover energy stocks but I do think that this area will continue to do well.
Future Business Trends
As the baby boomers age it is interesting to think about what kind of businesses might do well as a result of meeting their needs. Also the “cocooning” trend seems likely to continue as people of all ages stay at home partly because there are a lot more ways to stay entertained at home than was the case years ago.
Nursing homes have long been touted as an example but the problem is there may be too many competitors. The fitness craze may not benefit much more because many boomers especially the less fit are going to start needing medical intervention including cosmetic surgery to maintain their desired youthfulness.
Cosmetic surgery providers will likely do well due to demand and limited competition (there is no surplus of surgeons). This will include everything from laser skin treatment to major surgery.
In Canada, the demand for more private health services will become an unstoppable force. Canadians with money and urgent health needs will simply fly south if clinics are not opened here. Diagnostic services like all forms of medical tests and medical imaging should be among the first services to become much more widely available on a user-pay basis.
In-home entertainment of all sorts including movies on demand satellite T.V., mega screen T.V. and virtual reality entertainment will likely continue to grow rapidly. Home security services will also likely continue to grow. These can be great cash flow businesses since users tend to become long-term subscribers.
Casual dining chain restaurants should continue to do very well. (Fine dining will continue to wither).
Gardening continues to grow in popularity. (There is a famous greenhouse near me that is an absolute gold mine).
As investors we should keep our eyes open for companies that not only have products that take advantage of these trends but focus particularly on products and services where quality matters and price competition is not as strong.
Is the Market a Buy Now?
It is always very difficult to predict where the market will go in the short term. However at this time I am more fearful of a decline than I am hopeful of further upside. The markets had a large increase in 2003 and in Canada the markets are up about 5% in 2004. Now we have long term interest rates starting to turn upward. Higher interest rates are like a gravitational force pulling stock prices down. It would take a very strong earnings season to overcome this.
I have updated my analysis of whether or not the Dow Jones Industrial Average is over-valued at this time. Click to access the article.
In any market it is always possible to achieve positive returns by being in the right stocks at the right time, but it is definitely far easier when the market in general is rising.
In all areas of life including business and sports it is sometimes the hungriest team that wins rather than the most skilled or the smartest.
In selecting companies to invest in I would prefer to invest with management that is hungry to win and make money. But I have to be careful that they are not so greedy that they are willing to take money from investors rather than win it by satisfying their customers.
Family or big-owner controlled companies often get a bad rap. But in reality such companies have done very well. (Think Wal-Mart, Microsoft, Berkshirehathaway, Dell and many others in the U.S. In Canada we have the Power group of companies, Power Financial, Power Corp., Investors Group, Great West Life, we have Canadian Tire, Buhler Industries and many others).
Quite often the owner/leaders of these companies are extraordinarily driven and hungry individuals. In most cases they will do everything possible to keep their companies growing. The founders of such companies are often much more passionate about growing their business than they are about getting personally wealthy. I consider it a good sign when these type of leaders make their money through their dividends rather than through very large salaries and stock options. When I see extreme salaries and stock option awards then I start to suspect that the leader is more interested in getting rich than anything else and I don’t trust them.
If you can find companies ran by very hungry and driven individuals who are also trustworthy then these companies will usually turn out to be good long term investments.