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The Insider’s Take on Retail Stocks

By Stansberry Research Interview Series
Monday, October 23, 2006

I’m growing more and more bullish on retail stocks.
 
The consumer discretionary, materials, and finance sectors accounted for 69% of corporate insider purchases in October so far. Finance has been seeing big insider purchases for the last two years, so its presence is nothing spectacular.
 
However, the consumer discretionary sector only hit my insider trading radar in the last couple of weeks. This sector is the domain of your weekend shopping trip, containing stocks like Starbucks, Target, Disney, and McDonald’s. In other words, the stocks that suffer when investors are worried about a recession.
 
Since insider purchases usually precede market moves by six months or so, a wave of insider purchases in a sector typically heralds an upcoming trend. I’m seeing one of those waves in the consumer discretionary sector.
 
Insiders at retail stocks are particularly bullish right now. In the last 13 weeks, there were 21 retail stocks with insider purchases and 64 retail stocks with insider sales.
 
Now this ratio of retail bulls to retail bears (1:3) may not seem particularly bullish to you. But historically, the rampant use of options in executive compensation keeps this ratio at 1:10... or even higher.
 
It’s clear that corporate insiders are banking on this year’s holiday season being a blockbuster. Many of these stocks have sold off on consumer-spending fears... and I believe the insiders see value the market is missing.
 
There are a couple ways to play an uptrend in the retail sector.
 
The broadest bet here would be to invest in the Powershares Dynamic Retail ETF (PMR). Top holdings in this fund include Nordstrom, Sears, J.C. Penny, and Best Buy. As you can see in the chart below, this fund is in a strong uptrend, having hit a new 52-week high last week.
 
 
The alternative (and potentially much more profitable) route is to invest in specific retail companies with heavy insider buying. I recently added one such company to my Inside Strategist portfolio.
 
Despite huge returns on equity, heavy insider buying, and double-digit revenue growth every year for the past 10 years, this company is selling for a bargain-basement 11 times cash flow.
 
Three more retails stocks to put on your watch list are Pep Boys (PBY), Sears Holdings (SHLD), and Cost Plus (CPWM). Corporate insiders in these stocks are betting on a happy Christmas.
 
Good investing,
 
Graham




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Market Notes
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Earnings today: AT&T, Halliburton, Texas Instruments, Veeco Instruments, and Netflix.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1224.71 +0.3% +11.4%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.19 -0.6% +7.2%
Euro 1.34 +1.4% -11.0%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%