Bargain buy or insider trap?

banker-xTracking the insiders can give us incredibly valuable information and foresight into the life of a stock, but simply seeing when company officers and directors buy or sell isn’t enough.

We have to look at a number of other aspects of the stock in question in order to know if and when the insider transactions will turn into significant movement.

This is a great, live example of a down stock with heavy insider action, and how we should respond to it…

In the past couple of weeks, Tile Shop Holdings Inc. (TTS) has had some of the most insider buying in the stock market. And the fact that this insider purchasing has been done by several insiders makes it even more significant.

Dating back to August 1, TTS has had five insiders buy a total of more than 507,000 shares, which is a value of more than $5 million. That is serious insider buying.

Why now? Here is the chart of TTS from Stockcharts.com:

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As we can see, TTS isn’t exactly a booming stock. In fact, it’s struggling mightily. So are the insiders trying to rescue it, or get in at a great price before it jumps back up into much higher prices?

Other than the eye test on the chart, how is TTS holding up?

Well, the annual data is good. TTS has seen an increase in gross profit over each of the past three years. However, gross profit has pretty much remained static over the past several quarters.

After doing a little digging, I have found at least one reason for the bad standing of TTS at the moment. TTS recently reported lower-than-estimated earnings of 8 cents per share when 10 cents per share was the anticipated figure.

That shortcoming pushed the price of TTS down further, and caused it to fall to where it is now—at least in part.

While the price is now the lowest it has been since August of 2012, we have to decide whether or not we think it will return to better form or continue to struggle.

The insiders who made purchases could simply see the current price of TTS as a bargain. However, the fact that five insiders bought TTS stock within days of each other leads me to believe that they know something that has the potential to push the price of the stock up much higher.

While the latter thought makes it appealing to get in on TTS ourselves right now, it isn’t enough for me to buy.

Out of everything we have examined for TTS, the cons outweigh the pros for me. The insider purchases may end up pushing the price to new heights, but TTS doesn’t appear to be in any position to become a healthy stock right now.

We will have to wait and see WHEN this stock may take off.

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