It’s hard to tell when a stock that has been in free fall for some time is about to stabilize. “Catching a falling knife”, as it is called, is hard to do psychologically and it is also risky- if a stock is down 75%, that means at one point it was down 50%, other investors bought it thinking it was a good value, and then it fell 50% further. There are a number of things that investors should look for when considering a stock which has been declining, and one of them is insider purchases. Using data from Fidelity and from our own records of insider transactions, here are five stocks which have dropped at least 10% this year and have seen at least one insider purchase since the beginning of September:
Best Buy Co., Inc. (NYSE:BBY) was another stock which is down this year (by 26%, as it loses ground to Amazon) that has seen an insider purchase as Board member Matthew Paull bought 6,500 shares earlier this month. Read our latest analysis of Best Buy. Wall Street analysts expect that Best Buy will be quite profitable in its next fiscal year (ending March 2014), and so the retailer has a forward P/E of 5. However, our impression is that much of the upside for shareholders would come from the company’s founder, Richard Schulze, successfully completing his proposed buyout.
Elizabeth Vorsheck, a Board member at Erie Indemnity Company (NASDAQ:ERIE), bought 1,000 shares last month. Erie, a $3.4 billion market cap insurance broker operating on behalf of the Erie Insurance Exchange, is down 18% on the year. This figure has pretty much matched the 17% decline in earnings that the company reported in the second quarter compared to the same period in 2011. It trades at 22 times trailing earnings, though it should be noted that there is a good deal of cash on the balance sheet.
Oil and gas drilling equipment and services company Weatherford International Ltd (NYSE:WFT) fell to about $12 in late May and has been at about that level for some time; it is currently down 19% from the beginning of the year. Dharmesh Mehta, a senior Vice President at the company, bought 5,000 shares in September, apparently expecting that the share price will start to improve. Weatherford has a trailing P/E of 27, but sell-side analysts project strong growth as the forward P/E is 9 and the five-year PEG ratio is 0.8. The company will likely need the supply glut of natural gas drilling equipment in the U.S.- which has outpaced demand as natural gas prices remain low- to disappear in order to hit these targets.
Board member David Nelson of Smithfield Foods, Inc. (NYSE:SFD) purchased 5,000 shares at an average price of $19.56. Read our article about the purchase and about Smithfield. While Smithfield has rallied somewhat in the past couple months, it is still down about 14% for 2012. The pork producer’s earnings have been down, falling 25% in its most recent quarter (which ended in July) versus a year earlier, but with the fall in the stock price the company trades at only 10 times trailing earnings.
Archie Dunham, the Chairman of the Board at Chesapeake Energy Corporation (NYSE:CHK), had owned about 250,000 shares of the company in early September, but in the middle of that month he bought an additional 75,000 shares. Chesapeake has been in the news a lot this year: it started to fall in the spring on poor management practices, dropped further after concerns that the company would not be able to sell enough assets to maintain cash flow, and began to stabilize after Carl Icahn began to invest in the company. It is down 11% this year. Learn more about Chesapeake.