Trolling the Earnings Season Wreckage for Profits

By Michael Brush
October 27, 2005

We’re in the thick of quarterly earnings season, so it’s no surprise to see stocks get whacked by 30% or more in a single day on bad news.

These jarring sell offs are tough on shareholders. But they also offer great opportunities to buy stock on the cheap from panicky investors clearing out positions at all costs for fear of losing even more.

The trick is: Which ones to buy?

One tactic is to go for stocks where insiders calmly step up and purchase shares when all hell breaks loose in their stocks. Don’t expect a rebound in a matter of days – the so-called “dead cat bounce.” Insider signals normally require six months or more to bear fruit.

Just take the buying as a sign insiders are fairly confident that whatever problem caused the quarter to crack up can be fixed at some point – so the depressed shares represent good value. I like it even better when analysts turn on the stock as well as investors, while insiders challenge both groups by purchasing shares. Typically in these situations, the insiders ultimately win out.

I suspect that will probably be the case with TNS (TNS), a company in the electronics payments processing business, and Cott (COT), a Toronto-based maker of private label sodas.

Here’s a closer look.

TNS

Shares of TNS took an ugly dive in mid-October when they fell to $18 from over $24 in a one-day gap down that gave back all the gains in the stock since April.

The company – which provides data-communications services to businesses that process credit card, debit card and automated teller machine transactions – missed sales targets and announced that some contracts slipped.

Down here where insiders bought, the stock looks reasonably cheap, trading at 1.5 times sales. True, missing numbers so soon after a secondary offer is bad form on Wall Street. So management will have a challenge in rebuilding credibility.

But the company still has a “full pipeline” of potential deals which could add significantly to earnings in 2006 and 2007, says Gary Prestopino of Barrington Research Associates. “We view the magnitude of the decline in price as overdone,” says Prestopino.

Insiders agree. The chief executive and the finance chief bought nearly $450,000 worth of stock for just under $18 in the sell off.

I’d rather see Prestopino hate the stock, because there’s more upside potential in insider-buy stocks without friends Wall Street. With no support from analysts, a stock gets whacked even more – so you can pick up an even better deal along with the insiders.

Cott

That might be the case with Cott, a private-label soft drink maker which is now widely despised by analysts – after a series of mishaps.
Cott’s latest offense: On October 20 it missed earnings estimates by a wide market when it reported a loss of three cents a share. Analysts had forecasted profits of 28 cents a share. Cott missed numbers because it took a charge for restructuring costs. It also faced a sales slowdown in the U.S., a shift toward low-margin bottled water, and higher packaging and raw material costs.
Investors have punished Cott shares so badly – it’s fallen to $14 per share from $26 in August – that the stock hasn’t been this cheap in five years. The stock has a price to sales ratio of .59.
Yet Cott still has a dominant share in the private label carbonated soft drink market, and it counts major retailers like Wal-Mart (WMT) among its clients. A decline in the price of oil should help bring down the prices of resigns used by Cott.
Management does have a restructuring job ahead to deal with capacity issues and other excess costs. Yet they seem to have confidence they can get the job done. The chief executive and the finance chief bought over a half a million dollars worth of stock for $14.10 recently.
The bottom line: It’s always tough owning a stock that slips 30% overnight during earnings season because of bad news. So why not take advantage of these nose-dives as well – and fish for damaged goods in the earnings wreckage along with the insiders? I think both of these stocks are good buys right here for decent gains in a year or two.
Disclaimer

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. 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/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.