5 safe stocks insiders are buying

By Michael Brush

Repeat after me: Buy low, sell high.

Yes, the stock market has been crumbling, with some areas of the market down more than 10% in a month. And sure, it's a scary thing to plunk down your money on stocks when your emotions scream "sell."

But this is when you should be buying, when stock prices are low. To help calm your nerves, it also makes sense to buy what I'll call safe stocks.

One of the best ways to find such stocks is to follow the insiders. Corporate executives -- and the companies themselves -- have a great track record of buying shares at the right time, when they're cheap. After all, insiders have the front-row seats. They know best of all how well their companies will be doing after the dust settles.

To find the stocks with the biggest insider interest, I turned to Indie Research, which tracks insider buying. I also consulted David Fried, who sorts through corporate buyback plans to find the ones that are truly bullish. That means the companies aren't granting big chunks of stocks to executives, and there isn't insider selling to offset the buying.

As of the start of this year, Fried's picks in his Buyback Letter were up 149% since the start of 1998, compared to 29% for the S&P 500 ($INX).

For an extra margin of safety, I stuck with large-cap companies that have an edge because of a powerful brand name or market dominance. I also looked for companies that sell things people are going to continue to use even if the economy weakens -- like milk or tax-preparation software. Here's a closer look at five stocks that are safe because insiders like them: The Home Depot (HD, news, msgs), Dean Foods (DF, news, msgs), Intuit (INTU, news, msgs), Dell (DELL, news, msgs) and MasterCard (MA, news, msgs).

Home Depot

Since early March, shares of Home Depot have fallen to $37 from $44. On May 17, management said it would buy back an additional $2 billion of its shares. That's on top of a buyback program that saw Home Depot reduce its share count by 1.3% in the past 12 months, says Fried. What's more, a director purchased $184,000 worth of stock on June 7 for $36.95 a share.

Why are insiders bullish on Home Depot stock? After all, high gasoline prices are pinching the consumer, and the housing sector slowdown looks bad for business.

It may be that the stock is simply too cheap to pass up. "Trading at 13.2 times earnings, that is pretty much the trough valuation for the last 20 years," says Eric Barden, co-portfolio manager of the Texas Capital Value and Growth Fund (TCVGX, news, msgs), which owns the stock. "We think that more than discounts any slowdown we may see."

Barden believes growth should remain robust at the world's largest home-improvement retailer. Home Depot continues to branch out into supplying building contractors. Its installation services are popular among baby boomers who have had enough of do-it-yourself projects. Home Depot is also expanding in Mexico and Canada, and China is its next stop. It's also still building plenty of new stores in the U.S. -- including more forays into urban areas.

Goldman Sachs analyst Matthew Fassler thinks all of these factors could help move Home Depot stock back up to $46 in a year, a 24% gain if you buy now.

Dean Foods

Since early May, shares of the dairy-products company Dean Foods have sold down as low as $34.66 from $40. During the weakness, a director has purchased $2 million worth of stock for prices between $34.75 and $37. The company also authorized an additional $300 million in share buybacks on May 3, says Fried.

Dean Foods' stock seems safe because milk is one of the last things we cut out in an economic slowdown. "There is very little change in milk consumption related to the economic cycle," says Barry Sievert, who handles investor relations for Dean Foods, the largest processor and distributor of milk in the country.

Besides milk, Dean Foods sells a lot of high-growth niche products like Silk soy milk, organic milk under the Horizon Organic brand and Land O' Lakes half and half.

Sales of these kinds of products in Dean Foods' White Wave Foods division are up 28% a year on average for the past five years. Analysts expect robust growth to continue because of consumer interest in healthy foods. Stephens analyst Farha Aslam has a 12-month price target of $44 on Dean Foods, which would bring a 22% gain for anyone who buys today.

Intuit

Intuit, which makes TurboTax software, is in an enviable position. No matter how much the economy slows, most people still have to do their taxes. It's the same for the 3 million small businesses that use Intuit's QuickBooks accounting software to help figure out how much they owe Uncle Sam.

"Our two biggest businesses are almost immune to the economic cycle," says Intuit finance chief Kiran Patel.

As a software company that doesn't have huge capital outlays for expensive equipment, Intuit has strong cash flow and solid financials. As Intuit shares fell below $52 in May from above $56, Intuit decided to use more of that cash to buy back shares. It announced a fresh buyback plan worth $500 million on May 17. Over the past 12 months, Intuit has reduced its shares outstanding by 5.7%, says Fried. "We believe our stock is a good investment," says Patel. "We believe it is undervalued."

T. Rowe Price Group (TROW, news, msgs) analyst Ken Allen says 32 million out of the 132 million people who file taxes used tax-preparation software. That leaves plenty of room for growth as more people switch over to software. As the leading tax software provider, Intuit stands to pick up many of those people as customers. Next, only about half of the 26 million small businesses in this country use tax preparation software, and Intuit should gain as more companies make the switch.

Dell

Analyst Laura Conigliaro at Goldman Sachs Group (GS, news, msgs) worries that Dell's plan to boost growth by spending more on customer service and cutting prices will be a drag on earnings growth for several quarters. She's not alone. Like Conigliaro, many analysts have a hold rating on Dell shares.

But Dell Chairman Michael Dell, who presumably knows the business better than the analysts, is having nothing of it. In late May, after a yearlong selloff that knocked Dell shares down 43%, the founder bought $70 million worth of stock at $23.99. Remarkably, this was his first purchase ever, following steady selling every year since 1988, according to Thomson Financial.

BB&T Asset Management analyst Keith Maher agrees that Dell shares look like a good value. "At this point, the stock is safe just on the valuation. The stock is discounting a lot of negative news here."

T. Rowe Price analyst Chirag Vasavada says one factor that makes Dell shares seem safe is that the stock has moved from the hands of momentum players to value investors who are less likely to run for the exits if Dell has another bad quarter.

Vasavada thinks Dell is partially protected from consumer weakness because it gets about 70% of its revenue by selling to other businesses. They are less likely than consumers to trim spending on computers in a mild economic slowdown. He thinks Dell should see sales growth pick up as it expands into emerging markets like China, India, Eastern Europe and Brazil.

Both Vasavada and Maher think the stock could trade in the low $30 range within two years, for a 30% gain for anyone who buys now.

MasterCard

When MasterCard launched in an initial public offering in late May, insiders purchased an impressive $10.6 million worth of the stock. That's a sign of confidence.

MasterCard makes money by collecting 14 cents on average each time a merchant uses its credit card processing network. These fees make up about two-thirds of revenue. The company also collects fees from banks using the MasterCard logo on cards.

"So many people around the globe are making the switch from cash and checks to plastic, and MasterCard is going to be right on top of that wave," says Morningstar analyst Ryan Batchelor.

He thinks MasterCard sales will increase by more than 10% a year over the next eight years. And since MasterCard's processing network is already in place, costs won't go up as much as revenue. Operating profit should grow 17% a year in the medium term, predicts Batchelor.

Given the legal challenges facing MasterCard, it may seem foolish to call this a "safe" stock. Rivals like American Express (AXP, news, msgs) are suing MasterCard for profits lost because MasterCard discouraged member banks in its processing system from issuing American Express cards for years. In separate lawsuits, merchants claim MasterCard colluded with its member banks to inflate fees.

Batchelor concedes MasterCard may eventually have to pay out as much as $1.75 billion to settle cases like these. But even with that liability on the horizon, he thinks MasterCard has such solid growth ahead that the stock is a buy at $45, for a possible move to $80 over the next four years. That's a gain of more than 75%.

At the time of publication, Michael Brush did not own or control shares of companies mentioned in this column. Brush is an award-winning New York-based financial writer who has covered business and investing for the New York Times, Money magazine and the Economist Group. Brush studied at Columbia Business School in the Knight-Bagehot Fellowship program. He is the author of "Lessons From the Front Line," a book offering insights on investing and the markets based on the experiences of professional money managers.