Insiders Are Betting on a Housing and Construction Recovery
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Two Board members at Texas Industries (NYSE: TXI) have indirectly purchased shares of the company’s stock since the beginning of February. A trust connected to Sean Foley has bought 1,000 shares, at prices of about $56.50, while an LLC related to Bernard Lanigan Jr. added 10,000 shares at similar prices. Studies show that insider purchases tend to be bullish signals (read more about studies on insider trading). We think that this is because insiders face a strong incentive to diversify their wealth away from the company and therefore reduce their risk; when they ignore the benefits of diversification and buy the stock anyway it signals high confidence in the company.
This is why, in addition to using hedge fund filings to detect changes in market trends (for example, we found out that most popular small cap stocks among hedge funds beat the S&P 500 index by 18 percentage points), we also maintain a database of insider purchases and take a brief look at significant insider buys to help investors decide if the company is worth further research.
Texas Industries is a cement and aggregates company with a market capitalization of $1.6 billion. The demand for cement in particular is dependent on construction, and so buying Texas Industries could be seen as bullish on the general economy, construction in particular, and housing. The stock price has risen 65% in the last year, though many traders are bearish as over 25% of the outstanding shares are held short. In the fiscal quarter ending in November 2012, Texas Industries reported a loss despite a 15% increase in revenue versus a year earlier; analyst consensus is that it will not be profitable in this fiscal year (which ends in May 2013) or the following one.
Interest in smaller-cap stocks such as Texas Industries among hedge funds and other notable investors is important because these stocks are more likely to be mispriced than larger-cap, more closely followed companies. We published a list of the most popular small cap stocks among hedge funds in our August newsletter and these names went on to outperform the S&P 500 by 18 percentage points between September and January (read more about our hedge fund strategies). Texas Industries does not seem to be particularly popular; while Mason Hawkins’ Southeastern Asset Management reported a position of 8.2 million shares at the end of September, no other investor in our database of 13F filings owned more than $20 million worth of stock at that time. We will have to see if that changed in Q4 2012 when new 13Fs are released in mid February.
We can compare Texas Industries to Cemex (NYSE: CX), CRH (NYSE: CRH), Eagle Materials (NYSE: EXP), and Vulcan Materials (NYSE: VMC). These companies are generally struggling in terms of profitability as well: Cemex is expected to see losses of 8 cents per share this year, Eagle trades at 51 times trailing earnings, and Vulcan is unprofitable on a trailing basis as well with a current-year P/E of over 200. CRH, with a trailing P/E of 19, is the only one which doesn’t look very overvalued at first glance. Of course, the theory is that over time a stronger economy will boost demand and all four of these peers carry betas of over 1.5 (Texas Industries’ is 1, interestingly). However, only Eagle reported strong revenue growth in its most recent quarter compared to the same period in the previous year. As we’d mentioned, that company is at least profitable on a trailing basis and may be a better prospect for investors who see this consensus buying as bullish on building materials in general.
We wouldn’t rule out the possibility of these purchases being profitable; as we’ve noted, Texas Industries is up strongly in the last year even with the Street forecasting losses next year. Yet the stock seems quite speculative due to its poor bottom line (although the same is the case for many other cement companies). Perhaps Texas Industries is best placed on a watch list in case of positive developments or earnings surprises.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!