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They Sell the Handshakes, You Book the Profits
By Michael Brush
Exclusively for InvestorIdeas.com
January 10, 2008
As regular readers know, when a beaten-down, small-cap stock with solid insider buying picks up the endorsement of a value shop with a good record, that can be a winning combo.
This one-two punch is no guarantee that a stock will bring profits. But it’s bullish when an insider buy signal is confirmed by value experts who have scrubbed the financials and given the business model the once over.
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That’s what we saw this week when Morningstar (MORN) added the payment systems software company ACI Worldwide (ACIW) to its list of stocks with a rating of five stars, Morningstar’s highest rating.
Morningstar is stingy with the five-star ratings, and insiders have picked up nearly a half a million dollars worth of stock in the past month, according to InsiderScore.com. I think these are two compelling reasons for investors with at least a medium-term horizon to pick up shares of this software company.
I know that employment levels – the engine of our economy – are beginning to fall to alarming levels. I know that brainy commentators at prestigious shops like Goldman Sachs (GS) are now giving 66% odds of a recession.
But I also suspect that at this point, a lot of that bad news is priced in to stocks. And I also know Goldman Sachs economist Andrew Tilton is forecasting a mild and brief recession – if it happens at all.
His reasoning:
- The Fed is going to cut rates aggressively.
- Washington, D.C. will open up the spending spigot or cut taxes – or both – to stimulate the economy.
- The weak dollar-strong foreign growth combo will be good for the U.S. exports and therefore its economy.
So if you don’t mind being a bit early, I think it’s a good time to add insider-buy candidates like ACI Worldwide.
ACI Worldwide
ACI Worldwide sells electronic payment software used by international banks and payment processors. The software is called BASE24.
As Morningstar analyst Brett Horn explains it, whenever you use a credit card or a debit card, electronic systems at several entities are in the mix – from the merchant, and the credit card company or an ATM, to the bank that issued the card. BASE24 provides the "electronic handshake" that connects these systems.
Customers are reluctant to switch away from BASE24 because they want reliability. So ACI Worldwide’s embedded software provides a kind of annuity which generates solid cash flow.
That’s the good news. The bad news is that sales growth hasn’t been too hot in the U.S., so ACI Worldwide has been on a mission to expand into related software offering help with things like fraud detection and cash management. It’s done some of this expansion through acquisitions, and so far they haven’t paid off too well. The company has also been distracted by accounting issues linked to stock options backdating under prior management.
But Morningstar’s Horn thinks ACI Worldwide will get a boost from demand overseas. “As foreign countries develop their own electronic payment systems, purchasing proven, reliable software like BASE24 instead of building their own is a compelling proposition,” he says. “We think over the long run ACI will re-establish itself as a company with a fairly stable revenue stream that generates solid free cash flow.”
The company will also benefit form cost cutting, says Horn. Plus it has enough cash flow to support a dividend or an increase in its stock buyback program. ACI Worldwide has a five-year revenue backlog of $1.3 billion.
Tax-loss selling candidates beget tax losses
Our tax-loss selling stocks presented in this column and this column had a good tradable bounce shortly after we wrote about them – many of them offering reasonable profits for anyone who acted quickly.
Unfortunately, not even being beaten down by tax loss selling at the end of the year offered much immunity from a 7% downdraft in stocks -- the decline we’ve seen in the broad indices already this year.
So now, virtually all of our tax-loss selling candidates are under water, compared to where they were when we initially suggested them. I could get myself off the hook by pointing out that I said they would be good for either a quick tradable move, or as long-term positions.
The first part was right – depending on when you entered. And despite all the gloom and doom in the market – I still think the second prediction will be right as well. So I’ve been personally adding many of the tax-loss selling candidates to my own portfolio. My recent buys are listed in the disclaimer section below.
The bottom line: For most of these stocks I have a two- or three-year time horizon.
Disclaimer
At the time of publication, Michael Brush held shares of Charming Shoppes (CHRS), Emeritus (ESC), Beacon Roofing Supply (BECN), On Assignment (ASGN) and Visteon (VC). 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.
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