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Eleven Stocks to Own for the Next Bull Run

By Michael Brush
Exclusively for InvestorIdeas.com
March 29, 2007

A lot of investors still seem nervous about stocks. And that’s a good thing if you are long – which is how you should be positioned right now.

Suddenly, there’s a lot more to be worried about. We have the subprime disaster scenario and rising gasoline prices. There are heightened geopolitical tensions over captured British troops in Iran. There’s all the confusion among gurus over what Fed Chairman Ben Bernanke could possibly mean when he says pretty plainly that you shouldn’t just assume interest rates are headed lower.

Amidst all the confusion, you can find plenty of “technical” signs that it’s time to be long stocks.

The level of short selling on the New York Stock Exchange by the public is high relative to the level of short selling by specialists on the floor, who presumably know more about the markets.
The level of puts (a bearish bet) is high compared to the level of call options (a bullish bet) – a sign that there is a lot of fear in the market.
The “smart money,” or big institutional traders who tend to be right more often, is bullish. Meanwhile, the “dumb money,” or smaller individual investors, has pulled away from the market. (If that sounds arrogant, please forgive me. I don’t make the rules on how to do well in the market. I just follow them.)

These are just some of the indicators, thanks to SentimenTrader.com, which tell us there is a healthy level of fear out there. When there’s fear, it’s often a good time to be long, because it means there’s a lot of money on the sidelines to drive up your positions.

But there also have to be good reasons to think economic growth will remain healthy. I think there are. Here’s a roundup.

Housing and autos – the two weakest sectors right now – are grabbing the headlines, but they only represent about 9% of the economy. Take them out and the rest of the economy grew by a very healthy 4.3% last year.
Economic growth should continue because the consumer is healthy. Why? People have jobs and they are getting raises. Unemployment is at a low 4.5%, and average hourly earnings were growing at a robust 4.1% recently. Household net worth recently rose to all-time record highs.
Liquidity, as measured by cash flow at companies and household deposits, is high.
Interest rates are still relatively low, with the 10-year bond yield at about 4.5%.
The rest of the world is growing rapidly, at a rate of more than 5%, and that has been boosting U.S. exports.

“Should housing and autos bottom this summer as we expect, second-half U.S. economic growth may be fanning “overheating fears” more than recession fears,” predicts Jim Paulsen, the chief investment strategist at Wells Capital Management who supplied the analysis above.

In an environment like this – where investors are nervous but there are clear signs the economy will stay on track – you want to be in what economists call “cyclical” names. These are the “economically sensitive” stocks -- meaning they grow the most when the economy is strong. They tend to supply things like basic materials and chemicals used in manufacturing or building. (Commercial building is strong). Or they are in areas like retailing or energy.

Here’s a roundup of eleven highly cyclical stocks that insiders were buying in a big way in the past week.

Owens Corning (OC)

It’s hard to be more cyclical than Owens Corning, a Toledo, OH-based building supply company that I wrote about back in November (http://investorideas.com/insiderscorner/Articles/110906.asp). Since then, the stock has advanced 10%. But it still has plenty of room to move, judging by the insiders. They were big-time buyers again on March 21, when they purchased around $1.6 million worth of stock at around $31.78. Recently, Owens Corning only got about 36% of sales from new residential construction in the U.S. and Canada, while the rest came from residential repair and remodeling and the healthy commercial construction market. So it may not be as exposed to the housing sector disaster as many investors think.

Brookfield Homes (BHS)

Speaking of housing, if you wanted to venture in to this sector you would be in good company at Brookfield Homes. The Fairfax, VA-based homebuilder’s chief executive Ian Cockwell just bought over $2.1 million worth of his company’s stock for around $32 to $32.50. Two notes of caution here. He obviously knows a lot more about the housing sector than I do, but personally I think it’s still too early to call the bottom there. Second, his record shows he doesn’t have the best timing as a buyer. Still, that’s a hefty purchase and a big vote of confidence in his company’s shares.

Industrial Enterprises of America (IEAM)

At the other end of the spectrum in terms of market cap we have Industrial Enterprises of America, a $78 million market cap company that sells chemicals, additives and fluids used in cars and air conditioning systems.

This stock has doubled since I wrote about this company in early December (http://investorideas.com/insiderscorner/Articles/120806.asp). I think it will go even higher because the company’s chief executive John Mazzuto just purchased another $600,000 worth of the stock at $6. The stock got a bounce Wednesday on news of this purchase, and this name moves around a lot. So it may pay to be patient and buy with limit orders.

Industrial Enterprises grows by buying “mediocre” companies and turning them around. It is also opening a plant in China which should bring down costs.

Auto related

The U.S. auto industry is in the dumps, but insiders at two companies selling into the sector see blue skies ahead for their stocks. At Johnson Controls (JCI), director Eugenio Clariond has purchased $6 million worth of stock since February 14. The Milwaukee, WI-based company designs and sells interiors, electronics and displays used in cars and trucks. It also sells car batteries and equipment used in heating and air conditioning units.

While insiders at Johnson Controls are buying strength in their stock, insiders at Hawk (HWK) are buying on weakness. Hawk shares have declined from $16 last October to below $10, where insiders recently picked up over $250,000 worth. The Cleveland, OH-based company makes “friction products” used in brakes, clutches, and transmissions. At a tiny company like this ($89 million market cap), I’ll take that as a solid buy signal.

Retail and home related

Retailers should continue to do well in a strong economy, and insiders at two of them see more upside for their stocks. An insider at discount retailer Big Lots (BIG) recently bought $160,000 worth of stock for around $31.90. And two directors at Chico's FAS (CHS) recently purchased about $250,000 for $22 to $23.28. This could be a signal the stock is about to break out of a six month basing formation that’s had it trapped in the $20 to $25 range.

Storage stocks have done well since I wrote about them last June (http://www.investorideas.com/insiderscorner/Articles/060806.asp). But insiders recently stepped up and bought about $450,000 worth of shares at one of them -- U-Store-It Trust (YSI) – in a pullback. They purchased at around $19.90. At these levels, the stock pays an annual dividend yield of 5.8%.

Energy

A director at the pipeline company Valero (VLI) just bought a sizable $1.5 million worth of stock. The director, William Greehey, is worth following because he made big purchases much lower last May. Aubrey McClendon was back at it again at Chesapeake Energy (CHK). Last week he purchased over $6 million worth of stock for about $30.60.

And finally, there’s been another significant round of buying at Freeport-McMoRan Copper & Gold (FCX) since I wrote about the company on March 1 (http://www.investorideas.com/insiderscorner/Articles/030107.asp). The stock has advanced 18% since then, but it should go higher because insiders recently purchased another $16 million worth of stock in the $62 to $64 range. Gold producers can do well when the economy is strong because of concerns about inflation.

The bottom line : Investors are nervous but the economy looks fine. That’s the time to be in cyclical stocks like these ten.

Disclaimer
At the time of publication, Michael Brush owned shares of Owens Corning and Industrial Enterprises of America. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorI deas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp . InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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