More Gains Ahead? Insiders Provide Clues on a Business Turnaround

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In the course of daily news flow, special situations emerge in the stock market that create unprecedented buying and selling opportunities. American educator and professional speaker Stephen Covey often spoke of his 90/10 Principle, which states that life is 10% of what happens to you and 90% how you react to it.

Mr. Covey’s principle certainly holds true in the stock market, as investors are greeted with the unexpected on a frequent basis.

Below are three special situations that have materialized in recent weeks. The stories are made even more compelling as insiders have stepped in and bought on weakness, a potential sign of better tidings to come.

Read on to learn if you should be following in the footsteps of corporate insiders.

Aerovironment

AeroVironment (NASDAQ: AVAV) is a leading manufacturer of unmanned aircraft systems and electric transportation solutions, most often supplied to the U.S. Department of Defense and allied military agencies. The company also manufactures a variety of electric vehicle charging systems utilized by consumers, automakers, and other stakeholders.

On March 5, AeroVironment reported fiscal 2013 third quarter results, causing shares to be halted pending the news release. Management announced a massive earnings per share and revenue shortfall of $0.17 EPS on $47.1 million in sales. CEO Tim Conver stated to investors, “We believe these are delays in order timing, and not lost orders” as delayed government procurements caused a deferral in sales.

The Q3 deficit resulted in AeroVironment reducing its full year guidance to $0.30-$0.50 EPS on sales of $230 million -$250 million. The company’s fiscal year ends on April 30, and Q4 results should be announced in June.

Wall Street has maintained optimism on AeroVironment following the disappointing quarter, trusting the CEO’s message to investors of poor timing and not lost sales. Analysts at Benchmark Company reiterated a “buy” rating and $24 price target on the stock on March 6 citing potential upcoming catalysts. Goldman Sachs also initiated coverage of AeroVironment with a “neutral” rating and $25 price target on April 15.

Insider buying in recent weeks adds to the bullish bias on AVAV. Board member Arnold Fishman purchased 50,000 shares of stock in a series of open market transactions from April 5 through April 16. The total amount of purchases following the recent earnings disappointment exceeds $900,000, indicating a high level of confidence from this informed investor.

I believe the AeroVironment turnaround story for the next 12 months, even in light of a tepid defense spending environment. Management may need an additional one or two quarters in fiscal 2014 before normalized earnings are reached.

The Wall Street Journal also reported in February (paid registration required) that drone makers such as AeroVironment are looking to U.S. agencies, universities, and police departments to limit a revenue shortfall as budget cuts continue to pressure defense spending.

AGCO Corp.

AGCO (NYSE: AGCO) manufactures and distributes agricultural equipment and related replacement parts on a global basis. The company operates under the market-leading Challenger, Fendt, Massey Ferguson, and Valtra brands among others.

Shares of the agricultural equipment maker have stalled in the first half of 2013 after management reported weaker-than-expected fiscal 2013 guidance during its Q4 2012 conference call on Feb. 5. The company expects tractor and combine production to be flat year-over-year, with a high level of confidence that first and second quarter 2013 will not show any earnings or sales growth over prior year.

Management provided earnings guidance of $0.85 for upcoming first quarter earnings, significantly below $1.06 EPS consensus. Unlike AeroVironment above and Wet Seal below, Wall Street is not as optimistic in the near term on AGCO following recently announced setbacks. Analysts at UBS and Wells Fargo both downgraded the stock in the wake of the news.

However, board member Mallika Srinivasan purchased 80,373 shares of AGCO stock in April and is now one of the company’s five largest shareholders with a 5.5% ownership of the total company. The total value of the recent purchases is approximately $4 million, with Srinivasan owning a significant amount of stock beforehand. Srinivasan is the chairman and CEO of Tractors and Farm Equipment Limited, the manufacturer of Massey Ferguson and TAFE branded tractors for India.

The Duluth, Ga.-headquartered AGCO will release Q1 2013 earnings before the market open on Tuesday, April 30.

Wet Seal

Wet Seal (NASDAQ: WTSL) is a specialty women’s clothing retailer that sells apparel and accessory items designed for female customers aged 15 to 39 years old.

The Foothill Ranch, Calif.-headquartered company has struggled to compete as Victoria’s Secret, owned by Limited Brands, and other women’s retailers have garnered a stronger appeal with the target female audience.

On March 21, Wet Seal reported Q4 2012 earnings of ($0.06) on sales of $161.7 million. Same-store sales declined 8.3% during the quarter, including 9.1% and 3.1% declines at Wet Seal and Arden B. stores, respectively.

A number of events have occurred since the Q4 earnings release that translate from a bearish to a bullish bias. On April 1, the company announced the promotion of two divisional merchandising managers for the Wet Seal brand, both of whom will report directly to the CEO. Subsequently in a separate release, Wet Seal announced the resignation of the president of the Arden B. brand and a permanent replacement who is coming from competitor bebe stores, inc.

Wall Street is also becoming more bullish as management transitions the Wet Seal brand to a new fashion model, and the improved financial impact could be evident as soon as fiscal Q2 2013. Analysts at New York-based Brean Capital reiterated a “buy” rating and $3.75 price target on March 22. Following the management shake-up on April 8, analysts at Ascendiant Capital issued a “strong buy” rating and $4 price target on the stock.

Insiders have also been buying in recent weeks. Board member Lynda Davey purchased 62,500 shares of Wet Seal on the open market for approximately $3.19 per share. The total transaction value amounted to $199,375 when the stock was bought on April 15.

On the recent earnings call, management announced plans to open 19 new Wet Seal stores during fiscal 2013. Value investor Karen Finerman also owned the stock during fall 2012, although she disclosed no position on her most recent 13F filing.

Foolish Bottom Line

While there are numerous reasons for corporate executives to sell, insider buying takes place for only one reason. Each of the companies above fits the definition of a special situation, and now may be the right time to invest based on recent conviction from insiders.

AeroVironment’s quarterly report cards can undoubtedly be affected by postponement in Washington. However, Wall Street is betting that demand for unmanned aircraft systems and autonomous electric vehicles will continue. If you believe timing is the only concern, then I suggest buying AVAV as a long-term speculative holding.

While AGCO is experiencing a business slowdown in its end markets, there’s no question that the company has a long growth trajectory ahead in emerging markets such as India. I recommend accumulating the stock on any weakness and view AGCO as the safest pick among the group.

Finally, Wet Seal’s initial turnaround steps appear optimistic, although only time will tell if the new management team can make inroads on competitors such as L Brands. An outside buyer such as private equity may be likely if Wet Seal isn’t able to improve sales in the next 12 months.

Thanks for reading, and consider subscribing to my posts for more Fool ideas on outperforming the market. Requests for future articles may be submitted to fool@johnmacris.com.


John Macris has no position in any stocks mentioned. The Motley Fool recommends AeroVironment. The Motley Fool owns shares of AeroVironment. 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!

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