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Eric Schleien
Eric Schleien

Stocks that get a BUY BUY BUY

June 03, 2007 | About:

As a fellow value investor I tend to look for stocks that are cheap. That’s the whole concept, the cliché of investing: buy low sell high. The problem is not many people know what low is. After all, everything one would want to know about a company is usually priced into the stock. Of course there are exceptions but for the most part a stock is priced accordingly to intrinsic value. A perfect example would be Coca-Cola (KO). Is Coca-Cola undervalued, overvalued, intrinsically priced. The best we could say is that it is probably intrinsically priced. If the next quarter is a blowout quarter the stock will rise accordingly and the contrary would also deem to be true. At best we know Coca-Cola is probably intrinsically priced.

Sometimes investors can gain an edge over the market. Hedge fund managers, individual investors, and everyone else essentially has no way of getting insider information. The only people who know insider information are…well insiders of course.

Using this logic an investor can figure out a stock could be a good deal by acting upon the two main indicators of company insiders thinking a company is cheap. The first indicator is company executives are literally buying shares of their own company on the open market. Let’s face it: company executives know a lot, more than we will ever know about the company. Therefore, if a company executive is buying up lots of shares of his or her own stock, it probably isn’t going bankrupt very soon. Second, he or she may know of something about the industry or company that will benefit the stock price.

The second indicator is stock buybacks. A company will buy back its own stock when the insiders of the company feel their stock is trading on the cheap side. Perhaps the industry is out of favor or the company just had a bad quarter. When a company buys back their shares it reduces the shares outstanding which will exacerbate any good or bad news into the stock price. One should be careful of stock buy backs when compensation is tied to Earnings Per Share (EPS). If company XYZ Inc. had 100 shares outstanding and made 100 dollars that quarter. The Earnings Per Share would be 100 dollars divided by 100 shares or one dollar per share. If the company buys back 50 shares, the earnings per share would now increase (100 dollars / 50 shares = 2) by 100% even though company performance stayed the same.

So say a company is now buying back stock and insiders are buying. This does not mean the stock is cheap by any measure. Sometimes company insiders are so closely tied to a company that they get caught up in their own hype and growth. Sometimes companies buy back stock at extremely high levels. These insiders are people just like you and me when it boils down to it meaning they have the same emotions that many investors have when getting involved in financial markets. They buy high and sell low – as bipolar as Benjamin Graham’s Mr. Market.

Fortunately, there’s a third indicator that can tell when a stock is cheap. GuruFocus lists value investing gurus such as Mohnish Pabrai of Pabrai Funds, Warren Buffett of Berkshire Hathaway, Seth Klarman of The Baupost Group, and Joel Greenblatt of Gotham Capital. These are just a few of the guru’s listed at GuruFocus.com. When one of these value investing gurus buys a stock which insider’s are buying as well and the company is buying back shares, one could place a good bet his or her portfolio will do well if one diversifies among several of these situations. It has been shown that company’s that buy back there own shares outperform the market. When you combine an investing strategy that outperforms the market with gurus who have outstanding track records cherry pick what they feel are the cheapest companies of that bunch – you as an investor are probably going to do very well to say the least.

That is the idea behind the Triple Buys indicator of GuruFocus. The Triple Buy indicator let’s you screen for companies with gurus buying, insiders buying, or stock buybacks for the entire stock market. You can mix and match the criteria and even chose constraints on a category you feel is more important. For instance I can screen for companies with more than two gurus buying, a company buying back at least 10% of their stock, as well as at least 1 insider buying. You can do all this and more with GuruFocus.com’s Premium Tools which are available to try risk free.


About the author:

Eric Schleien
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.1/5 (9 votes)


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