Why is This Insider Buying Valhi?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Insider trading sentiment is an underrated, underreported form of investment analysis that allows the average Joe to peek under the hood of a publicly traded company’s management, though it only allows for a dichotomous conclusion to be drawn: bull or bear. In most cases, insider buying activity is the most consistent indicator, as there are many reasons for corporate executives to sell shares, but only one reason to buy. Over the past decade, a respectable group of empirical researchers – Lakonishok in 2001, Jeng in 2003, and Metrick in 2003 – has found that, on average, investors who mimic the buying behavior of corporate insiders can beat the market by 6.4 percent a year, risk-adjusted. Aside from these strategies, there aren’t many tactics that can duplicate this success. Below is one such stock that has seen a round of insider buying in recent months.
Valhi, Inc. (NYSE: VHI)
Valhi is essentially a holding company that owns several different subsidiaries in the chemicals, hardware, and waste management businesses. Since the start of the summer, shares of VHI have lost 37.9%, falling flatter than the basic materials sector (-8.7%), and competitors like Basf SE at -13.2%, EI du Pont de Nemours (NYSE: DD) at -7.02%, Air Products & Chemicals (NYSE: APD) at -5.7%, and Eastman Chemical (NYSE: EMN) at -4.4%. Interestingly, the company’s Chairman, Harold C. Simmons, has been buying Valhi in droves throughout these declines.
Simmons has held a stranglehold on Valhi since 1974, when he purchased the company with the fortunes he made from a drugstore empire in Texas the previous decade. Officially controlled by Simmons’ Contran Corporation, the magnate has used Valhi to acquire a range of down-and-out companies, from Kronos Worldwide to NL Industries. Unlike most corporate raiders, take Carl Icahn for instance, Simmons invests much more time and energy into his holdings, as he typically holds companies for multiple decades, turning floundering laggards like Amalgamated Sugar into industry leaders.
While Simmons has been quite the bull over the past year in general, the past few months have been especially active. Since April, he has purchased 115.823 shares of VHI for a total value of $2.34 million. These transactions have increased the Chairman’s total holdings of his company by nearly 10%. While the bears believe that this represents Simmons’ efforts at propping up his company’s share value, the numbers suggest that there may be some value here.
Since the recession, Valhi as a whole has seen its revenues grow at a rate of 10.7% a year, which is more impressive than the industry average (3.5%) and the likes of BASFY (5.7%), DD (6.7%), APD (-1.1%), and EMN (2.2%). Perhaps more impressive is the company’s efficiency, as it sports operating (24.8%) and net (11.8%) margins above the industry averages of 12.8% and 8.6% respectively. Expectedly, this has had a beneficial effect on Valhi’s bottom line, as it reported earnings of $0.64 last year, after reporting an EPS of just $0.14 in 2011. With a trailing-twelve months mark of $0.79, EPS is trending in the right direction, to say the least. It’s not all sunshine and rainbows; Valhi does sport a subpar cash conversion cycle (~30% slower than average), which essentially measures how quickly cash outflows are returned back to the company.
From a valuation standpoint, it still looks like the stock is oversold, as VHI is trading at a price-to-earnings ratio (14.0X) below the industry average (16.2X) and its own 3-year historical average (32.7X). Moreover, its price-to-cash flow ratio (21.4X) is slightly off its 3-year average (21.8X), even though operating cash flows have grown by 43.8% per annum post-recession.
WealthLift’s Sentiment Index rates Valhi as a hold, with the community’s users split on what the future will bring. The company reports its second quarter earnings on August 9th, so it would be wise to continually monitor this situation. If the company can deliver a positive earnings surprise, fairly valued shares of VHI would flirt with $13 a share. They currently trade in the $10 range.
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