While many investors moved to the sidelines in August and
slide was no deterrent to officers and directors at many companies.
Insider-buying was robust throughout the period and continues at
high levels now that
is underway (at which time "buying windows" open up for insiders).
I've been running through all of the insider transactions, focusing
on companies that saw a cluster of buying after
fell in the summer market rout. Of all the stocks reviewed, these
three look most appealing.
1. Avis Budget (NYSE:
Talk about a lost year. Executives at Avis Budget and
spent much of the last year entangled in a bidding war to acquire
Dollar Thrifty (NYSE:
. The proposed purchase prices climbed ever higher, quickly sapping
any accretive possibilities for the winner, so it's perhaps best
that no deal was ultimately consummated. Nevertheless, the damage
was done. Shares of Avis Budget had soared to almost $20 on hopes
that all industry players would benefit from any deal that reduces
competition. Now, the stock is back at $12, right where it was a
Yet Avis still has arrows in its quiver. A $1 billion deal to
re-acquire its European franchise should boost profits. The
combined entity will have more than $7 billion in annual revenue,
and the deal should bring about $30 million in synergies. More
importantly, the deal helps the company compete for global
contracts with multinational firms that had to stick with Hertz if
they were to work with one vendor in the United States and Europe.
A recent quarterly snapshot shows Avis Budget is healthy and
getting healthier. Third-quarter
will be above $250 million, according to an early-September
pre-announcement. A year from now, all other things being equal,
this figure should exceed $300 million when results from Avis
Europe are incorporated. EBITDA gains are coming from the fact that
used-car prices are very strong, meaning car-rental agencies can
recoup more of their investments as they turn over their fleets.
Meanwhile, the entire company's equity is valued at just $1.26
billion, and coupled with the debt, comes in under $4 billion.
With $600 million to $800 million in potential annual EBITDA
generation, shares look quite oversold, which is the likely reason
behind heavy insider-buying. A total of 15 insiders bought a little
more than 100,000 shares -- collectively -- in early October.
2. Ligand Pharma (Nasdaq:
Ligand's insiders have been "buying in the way up," meaning they've
continued to accumulate shares even as the stock's price has risen.
The buying began in early August when BVF Partners (which owns more
than 10% of the company and, for our purposes, is defined as an
insider because the large investor can't trade on material
non-public information and must file every time shares are bought
or sold) bought 600,000 shares over a three day period, worth about
$10 million, at just under $11 a share. Since then, several company
directors have also been buying at prices as high as $15. Shares
are back down to $14 currently, and look to have solid upside from
This is a unique biotech company. Rather than develop its own
drugs, Ligand invests in other biotech firms, generating income
from milestone payments and royalties that small firms get from
their Big Pharma partners. Ligand likes to focus on early-stage
firms needing cash and possessing considerable upside. Right now,
Ligand has a hand in more than 50 companies, about half of which
have already pushed their drugs to Phase II clinical trials or
To get a sense of the value of Ligand's investments, you have to do
a sum-of-the-parts analysis. Investment banking firm McNicoll,
Lewis and Vlak figures shares are a double from here, or worth $30,
while I have read elsewhere that a valuation analysis pegs the
stock at around $21.
3. Exco Resources (NYSE:
I've been discussing in recent days
, major investors are paying hefty prices to snap up
While I've been looking at what other companies might prove
attractive in an M&A scenario, I can't help notice that
mega-investor Wilbur Ross is setting his sights on this oil and gas
firm, which operates more than 7,000 wells in Texas, Louisiana and
Appalachia. By early August, Ross' stock purchases pushed his
ownership position to about $12 million, or more than 10% of the
company. Since then, he's bought more than 1 million more shares --
most recently on Oct. 13 -- though he has an agreement with the
company's board that his ownership stake won't exceed 20% -- at
least as part of any
Ross has been angling to
from Exco for quite some time. He was part of an ownership group
that initially sought to buy the company in 2010 for $4.36 billion
($20.50 a share), an offer that was eventually deemed to be
inadequate by the company's board. The stock has subsequently
swooned, and the company is now valued at just $2.5 billion.
Ross is taking advantage of the dip, but likely still eyes some
sort of exit strategy for the company at a presumably higher price.
The last deal fell through in part because the board was concerned
that the acquiring consortium would be too debt-constrained to
fully exploit the company's massive shale acreage. Ross, with
plenty of financial firepower on his own, would likely be able to
prove to the board that he can bring a stronger financing base.
Could another $20 a share
offer be in the works? Might the board re-consider its openness to
such a move, now that shares are just above $10? Time will tell.
Risks to Consider:
Insiders have a clear read on their businesses, but they are
notoriously bad market timers, and often buy a company's stock
before it has finally hit bottom. Their insider buying signals
should be just one part of your research process.
Action to Take -->
These insider purchases are major commitments from officers and
directors that already own a significant amount of company stock.
Their decision to boost their holdings even further is a sure sign
of company-specific bullishness, even if the broader market faces
stiff headwinds. Each of these three stocks appears to be good
deals right now, though you should research these names further
before committing to buy.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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