I love fried catfish. There’s a tiny hole-in-the-wall restaurant on a back road that you could drive by and not know what it was that serves the best catfish I’ve ever had in my life.

The owner is a jovial man who’s quick with a joke and an unassuming smile. Imagine my surprise when in the course of conversation, I learned that he can’t even eat his own food. He’s allergic to catfish.

It’s not his fault, but how could he honestly stand behind his product if he couldn’t even sample it? To my thinking, any business owner who wants to sell their product or service should also be an avid consumer as well. If they don’t use it, how can they expect me to believe in its value?

The same idea can be applied to stock picking. When I look for potential breakout stocks, one key giveaway that it’s undervalued is recent insider buying. No one knows a company better than the people who run it, so investors should pay attention when management starts buying stock.  

One tiny micro-cap company looks like it has all the right ingredients for value investors. In March, a director purchased $1.5 million worth of stock. In the past several months, hedge fund Ack Asset Management increased its position in the company by 27%, bringing the total investment to around $1.75 million.

Analysts expect earnings to turn positive this year with EPS around $0.09 and $0.17 in 2015 – an increase of 89%. The company has a long-term debt-to-equity ratio of a low 0.09, which helps keep potential liabilities to a minimum.

The company I’m talking about is S&W Seed Co. (Nasdaq: SANW). This $88 million company is engaged in the breeding, production and processing for the alfalfa and stevia industries. As arable farmland becomes scarcer, the company fills a need providing seed solutions to farmers around the world who rely on alfalfa hay to feed livestock — the supporters of the dairy and beef industry.

Heavy demand has helped to keep prices high for quality alfalfa. The average price for hay in the U.S. was $191 in March, up $3 from February. In the Western states, prices could climb as high $230 by the beginning of summer due to drought conditions keeping supply low.

One of the leading catalysts for the industry is the increased demand for dairy products overseas in emerging markets like China. U.S. dairy exports were up 19% in January from last year while Chinese imports climbed 30% over the same period. Global demand for dairy products is propping up the hay market and S&W stands to benefit from the trend.

The company maintains a solid balance sheet with current assets of $51.7 million and total liabilities of just $35.5 million. Gross margins are expected to be around 20% by the end of the year thanks to consolidation efforts.

S&W is expanding with plans for over 1,000 acres in Australia that should be available by June 2015 and a realized 7% increase in acreage in California. A biotech research and collaboration with Monsanto (NYSE: MON) has allowed S&W to create a tropical type of alfalfa hay that will service regions of the world that typically cannot support sufficient feedstock which should help S&W continue to grow aggressively. (Incidentally, my colleague Marshall Hargrave found a lot to like with Monsanto last month.)

Risks to Consider: As a micro-cap stock, SANW is highly sensitive to market fluctuations and trading activities. In addition, growth prospects are largely dependent upon strong dairy industry demand in order to support hay prices.

Action to Take –> The stock is up 9% this year and is trading near $7.50. The average analyst price target places the stock’s value at $10, representing a potential gain of 33%.

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