(By Rich Bieglmeier) It feels like the number of executive team members i.e. CEOs, CFOs, Executive VPs… stepped up their buying last week. Unlike most weeks where iStock finds one, maybe two insider purchases worth noting, this week we found 15 notable buys.
While iStock would love to touch on all of them, we'll only highlight our favorite with the best combination of fundamental and technical analysis.
In our view, the company that best marries a good looking chart and valuations is Chemtura Corporation (CHMT). Chemtura is a global specialty chemicals company that makes other products more durable, safer, cleaner and more efficient. Major industries served include agriculture, building & construction, electrical & electronics, consumer, general industrial and transportation.
On August 6th and 7th, three directors bought 40,200 shares at a cost average of $15.57 for a total investment of $625,798.40.
Running down iStock's usual checklist of favorite metrics, we see that CHMT fits nicely with the way we evaluate stocks. Analysts believe the basic materials company will earn $1.96 in 2013, an increase of 27.30% from 2012's projections. For now, Chemtura is trading with a forward P/E of 8.48, which is a substantial discount versus earnings growth.
On a trailing twelve month basis, CHMT's P/E of 14.37% is slight ahead of the industry norm of 13.93 times earnings. However, it trades at a substantial markdown based on price to sales (P/S) and PEG Ratio. Other companies in the same space trade for 71 cents for every dollar per share in revenue and Chemtura for 53 cents. Based on the chemical company's PEG Ratio, the stock is a better value than its peers with a ratio of 0.28, much lower than the industry's 1.16 – remember, the lower the better.
In the July 10Q, management wrote that they expect their AgroSolutions and Consumer Products segments to "deliver year-over-year improvement on a consolidated basis in the second half of 2012." Perhaps that's why the directors saw fit to put their money on the line?
Although revenues may improve, iStock did identify one major red flag while reviewing the company's balance sheet for the six months ended June 30, 2012. Accounts receivables skyrocketed 27% from $458 million to $583 million during the timeframe. Even though management says some of the increase is due to higher seasonal demand, this is something to keep an eye on; if customers don't pay, a substantial write-off could be coming. Additionally, a slight build in inventories because of "weaker than anticipated demand" in the Industrial Performance Products segment is another negative.
On a positive note, CHMT's share price has trended higher since the three directors bought. The stock broke free from a downward trading channel near $14.25 and reversed the direction of the 12, 26 and 50-day moving averages into bullish order.
iStock believes shares are heading into a resistance zone form the current level up to $17.60ish. There is a chance Chemtura could give back some of the gains. We would be more comfortable entering positions closer to $15.50 than today's price.
Overall, it is iStock's view that Chemtura Corporation's (CHMT) discounted valuations and projected earnings growth outweighs the financial statement risks we outlined. If the company meets 2013 earnings estimates of $1.93 and trades at 12 times earnings, we see as much as 40% price appreciation in the next 12-18 months.