“Little Known 9% High Income Gem — Insider Buying”

By Travis Johnson, Stock Gumshoe, June 20, 2007

This teaser was posted over at the forum a little while ago, and though I haven’t actually seen the original email the poster said it was sent out yesterday.

It’s from Mark Skousen’s Forecasts & Strategies service, which we’ve come across several times before, and it touts a company that has recently seen over $9.3 million in insider buying (so, perhaps of interest to those of you who were interested in the “USG-4” insider buying tease we looked at a few days ago).

The teaser info is a little bit sparse, but here are the basics:

“Last month, insiders at this little-known gem of a high-income company purchased more than 525,000 shares of their own stock at a personal cost to them of $9.3 million!”

And, perhaps most convincingly (if you remember the Neyhun study I cited in the USG-4 writeup), it’s not just one insider but six of them who made big buys last month.

Skousen believes that this convincing insider buying must mean that “this stock must be about to explode!”

The firm “invests in tax-exempt state and local mortgage bonds that finance multi-family low-income housing around the country.” Doesn’t sound that sexy, but the “tax exempt” has a nice ring to it.

“Similar to most mortgage companies, their revenues have been up, but earnings have been down and so has the price of the stock.”

Rising dividends, and a current 9.2% yield. Not bad.

So, do you want to sign up for a subscription to Forecasts & Strategies and find out the name of this stock? Or do you just want the name?

… foot tapping as I wait … If it helps your decisionmaking, Skousen charges $99 a year at the moment (it’s on sale, apparently) … just the name, though, is free if you’ve got a moment to continue reading.

I thought as much. The Gumshoe took a few extra moments in the pensivotronic and can now tell you that this company is …

Centerline Holding Co. (CHC), the parent of Centerline Capital Group

This is one of two companies that I’m aware of that focus on investing in tax-exempt mortgage bonds for low income multi family housing (actually, the company does more than that, but that’s one of the major divisions). The other company you might have heard of as well, Municipal Mortgage and Equity (MMA, referred to with affection as MuniMae). Just as an aside, MMA is also pretty interesting — they are expanding to do similar loans in other countries, and to do financing for solar installations and other energy efficiency projects.

Centerline used to have a catchy name, too — they used to be known as CharterMac, FYI, so you’ll see plenty of articles about them using that name (ARCap is a name that was sucked up by them, too). The dividend is slightly lower than the teaser indicates as of today’s price, it’s at more like 8.6% at the moment, but I’m comfortable with that since 9%+ would have been accurate in the recent past.

More importantly, I do know that Centerline has had almost exactly that amount of insider buying — back in May, directors and officers made direct purchases (ie, not option or restricted stock grants, but actual buys of stock with what I assume was their own money) of exactly 525,300 shares at a cost of $9.323 million. That’s a pretty exact match — and, though I don’t know a lot else about the company or those insiders, it’s a hell of a lot of insider buying from a group of people who ought to know something about the company.

Obviously, insiders are often wrong, too … but I’d agree with Skousen that this is pretty compelling. The studies of insider trading have said that what you really want to look for are multiple open market insider purchases within a relatively short time period by company officers and directors, and a company that has a relatively small market cap. You can see that this matches most of those, and I can tell you that this is a sub-billion dollar company at about $990 million. So, ON AVERAGE those insider indications would tell you that this one should go up.

That doesn’t mean, of course, that it will go up. But it’s got a little tailwind, at least. The trailing PE is very odd, probably a result of some restructuring it’s close to 200, but the forward PE is under 10.

Other info about this company? It’s not a REIT, but a finance company that focuses on real estate lending and investing (essentially, working as a middleman between investors and real estate developers — a complex mortgage packager, if you want to look at it that way). CharterMac became essentially one of the big divisions of the company, and they use tax credits for low income housing lending and other real estate financing to generate some pretty nice looking cash flow. It looks like the company is actually structured as a partnership or flow-through investment of some kind, since they issue K-1s for your tax returns. They also manage a bunch of investment funds, probably for institutional investors and folks who would otherwise look to buy municipal bonds.

I’m a little tempted by this company now, though I haven’t read enough to fully understand their structure and what risks there may be — this is actually one of the rare ones that I sleuth out that I find a bit compelling, those insider buys really do speak to me on some level. If anyone else is tempted and looks into it, please share what you find.

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5 Comments on "“Little Known 9% High Income Gem — Insider Buying”"

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Anonymous
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Anonymous
June 21, 2007 2:58 pm

Just checked on Yahoo for the insider buying. Lots of direct purchases recently and just what exactly is “acquisition (non-open market)”? Is this purchases from the company holdings, or private transferring of stock from one person to another? Love your site gumshoe….haven’t bought anything from it, but am thinking of this one.

Anonymous
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Anonymous
June 21, 2007 7:37 pm

I noticed insider buys in May for CHC and JRT. They had fallen on the sub-prime stories. I bought them both.

slowpoke

KRL
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KRL
April 12, 2008 10:21 am

I love using huge insider buying (not options, etc.) as a positive indicator, especially in a downtrodden stock that appears to have flatlined.

This looks very interesting…

Thanks GS!

JCS
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JCS
April 26, 2008 4:52 pm

Insiders make mistakes just like the rest of us. CHC went from a high of 19.95 in June, 2007 to 3.54 on April 25, 2008. The yield is now 16.95%. Ouch! Can someone analyze CHC and give an opinion about whether it may be a good buy at this level?

Max Value
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Max Value
June 1, 2008 4:44 am

It’s $2.47 now. When I see a chart that goes from top left steadily down to bottom right, I stay away. I’d wait to see some solid upward progress before even thinking about buying. You might miss the first big jumps, but that’s better than losing everything.

My buddy said (about another stock) “It’s only 15 cents! How can you lose?” Well, the answer is that if you put $1,000 into a cheap stock, you can lose the whole lot when the turkey goes bankrupt. $2.47 looks cheap now, but it won’t if the price reaches $1.23.

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