With the market posting weaker results in recent weeks, an increasing number of stocks are sinking further and further away from their 52-week highs. Finding which stocks deserve to be sold off and which are just victims of a tough market can be a challenge. That’s why it pays to follow the moves of officers and executives at publicly-traded companies, known as “insiders.”

#-ad_banner-#These individuals possess an inside knowledge of their company that the rest of us simply don’t have. And when their company’s stock experiences a major sell-off, insiders are pretty good at knowing if the selling is warranted or it’s simply the victim of investor panic. These insiders will then give the stock a vote of confidence by buying up significant blocks of shares for their own personal portfolios. 

Insiders help point the way to business models that should do well in 2011 and 2012, even if shares are being treated with disrespect by the rest of the investing crowd. The two companies profiled below caught my eye. Each has seen significant insider buying as shares fall lower.

Zoltek (Nasdaq: ZOLT)
This maker of carbon fiber which is stronger and lighter than metals such as steel and aluminum is used in turbines, airplane fuselages, rugged textiles and high-end cars. The company has had a rocky history, which I chronicled in early 2010. Shares subsequently doubled after I profiled the stock, but have weakened anew in recent weeks on the heels of rising costs and still-weak gross margins. Insiders are using the pullback as an excuse to buy shares: three directors have recently bought a collective 17,000 shares at around $10 a share, which is well down from the $16 peak hit in late February.

 

To be sure, this is a business that never seems to quite fire on all cylinders. Zoltek secured two new major customers this winter, Germany’s Saertex, and Mass.-based Cuming Corp., which both make carbon fiber for textiles used in the oil and gas industry for flotation devices and insulation.. Yet its largest customer, wind turbine maker Vestas, pulled back on orders. As a result, sales in the current quarter are likely to be flat with year-ago results.

The good news: Vestas is now seeing its own business pick up and should post new strong orders for Zoltek in coming months. As a result, analysts think sales can grow 20% in 2011 and again in 2012. As a vote of confidence, management has re-started production in a plant in Mexico to boost carbon fiber capacity.

The real challenge for Zoltek is to prove it is capable of generating solid gross margins and robust operating profits. A recent spike in prices for acrylonitrile, a key raw material, has impeded profits, but prices have started to come down as oil prices cool. Before profits rebound, insiders likely think shares have a floor in the $8 to $9 range, thanks to book value of $8.34. If Zoltek can ever fire on all cylinders with key customers simultaneously placing solid orders and raw material prices remaining in check, then this stock would likely quickly move back to the 52-week high of $16 — and perhaps up to $20. This would be a double from current levels.

Ion Geophysical (NYSE: IO)
After watching shares fall from around $13.50 in early April to less than $10 a month later, Chairman James Lapeyre snapped up 90,000 shares of Ion Geophysical at an average purchase price of $9.60. He should have waited a bit. Shares have fallen another 10% since then and now trade roughly 40% below those early April highs.

Ion Geophysical offers a wide range of technologies to customers in the energy exploration field, from software that maps out subterranean deposits of oil and gas, to services that help clients make the most of that mapping data. Ion saw great demand for its services in the middle of the last decade as sales rose from $150 million in 2003 to $700 million in 2007. The sharp pullback in energy prices that resulted from the global recession of 2008 quashed demand as clients sought to conserve cash. Sales fell to just $444 million by 2010.

The current year is off to an inauspicious start as well. Troubles in Libya led to the cancellation of a big contract, and a 2010 sale of a key division led to revenue in the first quarter simply being flat with year-ago results. Yet if you exclude that factor, then organic sales actually rose 25% in the quarter and are on track to rise by a similar amount for the rest of the year as well. This is because oil prices remain near $100 a barrel, which is helping clients boost profits and increase exploration plans.

Yet shares remain in a funk because investors have been told by management to expect a “back-end loaded” year. This means the most impressive growth isn’t likely to come until the third or fourth quarter. And that’s a signal for many investors to move to the sidelines in the meantime. For Chariman Lapeyre, this myopic shareholder reaction is good enough for him to step up and increase his stake in the company. He now owns nearly 2 million shares, or about $16 million worth of stock. He’s been the company’s chairman for more than a decade and likely takes a long-term view to shares. He rode the ups and downs of this business during the past decade and sees Ion Geophysical heading back into an up phase.

Action to Take –> The insiders of these two stocks have a birds-eye view of their businesses and have taken advantage of the market-induced selling in shares. Following their lead may prove fruitful for new investors.

P.S. — I don’t know if you’re aware of this or not, but a 20-year energy agreement between the United States and Russia is about to expire. The problem is, this deal supplies 10% of America’s electricity. When the Russians refuse to renew the agreement, the U.S. will face an entirely new kind of energy crisis. This disruption could send a handful of energy stocks through the roof. Keep reading…