Carl Icahn’s Buying This Stock… Should You?

| August 12, 2011 | 0 Comments

The stock market’s action this week gives new meaning to the term volatile.  We saw point swings of 625 on Monday, 640 on Tuesday, 542 on Wednesday, and 549 on Thursday.

It’s the kind of action only a rollercoaster aficionado can enjoy.

If you feel like pulling your hair out, you’re not alone.

Most individual investors are scared out of their minds right now.  And as a result, many are fleeing stocks without giving it a second thought.

But not every investor is a seller…

According to a Bloomberg report, “more executives at Standard & Poor’s 500 Index companies are buying their stock than at any time since the depths of the credit crisis….”  All told, some 66 insiders at 50 different companies purchased their company’s shares between August 3rd and August 9th.

That’s the most insider buying since the five-day period marking the market bottom in March 2009.

It’s a clear sign corporate executives see the current downturn as a huge buying opportunity.  And it’s a strong indicator the market’s selloff may be overdone.

What’s so important about insiders buying their company’s shares?

There’s a ton of research out there showing insider buying is good for a stock’s share price.  More often than not, after insiders make large net purchases of their company’s shares, the stock is higher six months later.

As far as market indicators go, large buying by corporate insiders is one of the more accurate predictors of intermediate term moves in stock price.  What’s more, heavy insider buying during market selloffs is a good sign a downturn will be short-lived.

With that in mind, I took a close look at insider buying over the past week.  It seems to me any insider buying big chunks of stock in this market environment is extremely confident in their company’s future.

As I scanned the list of transactions, one particular insider caught my eye…

He’s none other than one of America’s most famous corporate raiders, Carl Icahn.  In case you don’t know, Icahn has made a career of taking controlling positions in various companies and then using his muscle to turn them around.

With a personal fortune of $12.5 billion, Icahn is one of the 25 richest men in the US.

So what stock is Icahn buying now?

The company is Federal Mogul (FDML).

FDML is a leading supplier of parts, components, modules, and systems to customers in the automotive, small engine, heavy-duty marine, railroad, aerospace, and industrial markets worldwide.  The company was founded in 1899 and is headquartered in Southfield, Michigan.

Recent insider trading data show Icahn has been adding heavily to his stake in the company this week.  Between August 8th and 10th, Icahn scooped up 139,899 shares at a total cost of just over $2.1 million.  That works out to an average purchase price of $15.24 per share.

Clearly, Icahn believes FDML is a great buy around $15 per share.  But are the shares a good buy for you at these levels?

A quick look at the company’s most recent quarterly reports suggests it is.  Here’s a quick summary of FDML’s second quarter numbers…

Revenues jumped 13% year over year to $1.8 billion.  According to CEO Jose Maria Alapont, the strong sales increases were driven by market share gains in all original equipment business units.  And the company is seeing rising demand from aftermarket suppliers in emerging markets like China and India.

What’s more, the company’s enjoying big gains in profitability.  Net income surged by 30% in the most recent quarter to $64 million.  And earnings increased by 31% to $0.64 per share.

The best part is, FDML beat analysts’ estimates for both revenue and earnings.

No doubt about it, the company’s showing strong growth in a difficult economic environment.

But the best part is, the shares are a huge bargain after the recent market drop.

At a recent price of $17.28, FDML is trading at just 8.3x the 2011 earnings estimate of $2.09 per share.  That’s well below the industry average P/E of 37.4x earnings.  And it’s a paltry P/E for a company expected to grow earnings by 54% this year and 24% in 2012.

Based on these figures, it looks like Icahn still knows a bargain when he sees one.

Take a closer look at FDML for your own portfolio.  Right now you can grab a piece of this solid, fast-growing business on the cheap.  And you can follow in the footsteps of one of America’s all-time greatest investors.

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Category: Stocks

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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