Friday, February 2, 2007
Here it is.
For the last couple of months, practically every other week, I've said we were due for a correction, pointing out that insiders have been selling the farm since November. Thousands and thousands of insiders are dumping shares in their companies, and the ratio of money coming from sales to money going into purchases is about 100 to one.
But here's the mother of all bearish insider statistics...
As of January 29, 2007, insiders had only bought $13 million worth of stock for the entire month of January.
Now, $13 million may seem like a lot of money, but unless insiders break $19 million for the month, it will be a 16-year low in insider purchases – a 16-year low. (The Volatility Index, you'll recall, hit a 16-year low last fall.)
We can attribute some of the heavy selling of the last few months to options and stock grants. But when insiders fail to put any of their money into the market, it doesn't bode well for investors over the next several months.
We can continue to ignore the signs and focus on the positive... the Fed held interest rates at 5.25%... the Dow continues to hit record highs. Really, though, a correction is inevitable.
But that's not necessarily bad news. What you should do is put a couple of select "safe haven" companies on your watch list. As soon as the market falls, load up.
First is American Capital Strategies (ACAS). Last year, private-equity firms spent a record $540 billion to acquire companies, up from $59 billion three years ago. Private equity as a whole has hit bubble proportions, but there are still gems in the industry.
Most notable is American Capital Strategies, a publicly traded middle-market LBO firm. Since it went public in 1997, ACAS has shown an average annual return of 23% and has paid out $22.44 in dividends.
I recommended it to Inside Strategist subscribers in July. At that time, American Capital's high-level executives had just bought $7 million of the company's stock on the open market. The stock closed at an all-time high yesterday. We're up 50% in six months' time. But it's still cheap at nine times earnings and it has a 7.4% yield.
You could buy now, but American Capital has had quite a run. And we're likely to see a dip in shares when the market correction hits. When it does happen, I highly suggest loading up.
Another company to consider is Enterprise Products Partners (EPD).
Enterprise is one of the largest publicly traded energy partnerships in the U.S., with an enterprise value of more than $12 billion. The company transports natural gas, natural gas liquids (NGLs), and crude oil through some 32,670 miles of onshore and offshore pipelines.
Enterprise doesn't own natural gas, or any other commodities. It merely processes, refines, stores, and transports them. In other words, Enterprise offers the services every natural gas company needs. Even if the energy market collapses and producers go broke, Enterprise will still make money.
At 20 times earnings, Enterprise isn't even close to cheap. But if it ever gets back into the $20-$25 range, you should back the truck up. That 6.4% yield will be even more attractive.
More and more, I'm a fan of income plays. Whenever the market's future gets uncertain or risky, it's good to still have some money flowing into the trading account. So take advantage of the correction, when it finally comes, to pick up a couple of great bargains with high yields.
Overwhelming new highs list today... led by chemicals and steel.
Chemical companies Lubrizol, FMC, BASF, Bunge, Ferro, Clorox, and Lyondell all hit new highs.
Steel companies Mittal, Corus, United States Steel, Posco, and Chaparral hit highs.