As the
market
moved steadily higher throughout the fourth quarter of 2011 and the
first quarter of 2012, insider buying slowed to a crawl and
eventually ground to a halt. That's just how insiders operate. They
like a bargain just like everyone else, and frankly, by the end of
the first quarter, it was getting harder to
spot
verifiable bargains.
Of course, a slumping market is a sure-fire magnet to get these
insiders to open up their checkbooks. And that's precisely what's
going on. Since the start of May, roughly a month after the market
began to pull back, insider-buying has surged. Right now, it's
common to find a half-dozen or more daily instances of at least
$100,000 in fresh insider buying by a key executive.
Yet you shouldn't necessarily follow their lead and take their
actions as a buy signal. After all, insiders are notoriously bad
market-timers, and their buying often comes before even deeper
drops ahead. Instead, I use insider-buying signals for long-term
investment ideas, but almost never as a short-term trade.
I do look to insider-buying signals when I'm
bearish
on a stock. Fresh buying, after a stock has fallen substantially,
may signal that the opportunity on the short side has already been
fulfilled. For example,
Netflix's (Nasdaq:
NFLX
)
Jay Hoag, a company director, has bought a hefty $25 million in
company stock in recent days at an average price of around $73 a
share.
I thought Netflix was
overvalued
in early March
when it traded for $113 a share, and I still thought it was
overvalued
in late April
when it had plunged to $86. I still think this company's upcoming
challenges have yet to be factored into the stock price, but a move
down to $70 -- along with that inside buying -- would make me cover
a short position if I had one in place.
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Here are three other stocks with recent insider buying that are
worthy of more research:
1. Merge Healthcare (Nasdaq:
MRGE
)
This provider of digitized medical-imaging services has fallen by
two-thirds from its
52-week high
, taking a final sharp blow in early May when management announced
that sales growth would slow this year. In response, six insiders
have recently bought nearly $1 million in stock (on a collective
basis), and this move could pay off handsomely because this stock
looks quite oversold.
Merge is well-positioned to handle the ongoing shift in the
health care sector away from written medical records to electronic
medical records. The company's software works with all of the major
health care information technology (
IT
) providers' systems, and by all indications, sales should again be
rising at a sustained double-digit pace in 2013 and beyond.
2. Geeknet (Nasdaq:
GKNT
)
Straight away, I'd caution that this is a thinly-traded micro-cap,
so it comes with its own set of risks. Geeknet recently decided to
shed one of its two business lines, which could unlock real value.
For a number of years, Geeknet worked to be a major player in the
world of tech websites, operating sites such as Slashdot (an IT
newsblog) and Freecode (which distributes Linux code and other
software). Trouble is, there were never really big profits to be
made from these sites. Now, management wants to unload those sites
to better focus on a burgeoning e-commerce business.
This company's eponymously-named website, thinkgeek.com, carries
a wide range of unique tech gadgets, many of which are exclusive to
the company and are often hot-selling gifts during the holidays.
Sales in this business rose 50% in 2010, another 30% in 2011 and
could rise another 15% to 20% this year to about $140
million.
Insiders, led by Chairman Ken Langone (who co-founded
Home Depot NYSE:
HD
)
), have been steadily buying small clusters of stock since
February, picking up more stock late last week after the company
announced plans to seek a buyer for the various websites.
Beyond the growth metrics noted above, this is also a value
play. Net cash of $32 million accounts for more than one-third if
the stock price. If you back that out, then the price-to-sales
ratio for this e-commerce play is less than 0.5 (said another way,
every dollar of stock you pay for gets you 50 cents in sales).
3. Vocus (Nasdaq:
VOCS
)
Vocus helps corporate clients manage their online marketing efforts
using search, social media and other tools. In late February, this
company made a bold
acquisition
-- and
shares
got crushed as investors realized the deal would hurt profits now
but boost them later. A decision to buy iContact, an e-mail
marketing firm, for $169 million is expected to help Vocus
offer
an even wider array of integrated marketing tools.
[block:block=16]
Still, management conceded that the deal would lead to much
lower near-term profits as expenses build in support of a larger
sales force. Full-year
earnings
forecasts fell by half or more, and Vocus is now expected to earn
roughly $0.40 a share this year (down from $0.81 in 2010) and about
$0.65 in 2013. Though shares have fallen from $34 to $15 during the
past year, they may not look like a deep bargain on a price to
earnings (P/E) basis, but a group of five insiders recently bought
more than $1 million in stock (collectively) at an average price of
around $16. That surely makes this stock worthy of further
research.
Risks to Consider:
As noted above, insiders are notoriously poor market-timers,
and these stocks could fall even more if the market stumbles badly.
Don't confuse insider stocks with value stocks.
Action to Take -->
Insiders have a much better track record if you have a one to
two-year time horizon. Their buying often comes at a time when a
company is in transition, as is the case with these four stocks
noted above, and it often takes several quarters for that
transition to play out. Still, they could turn out to be great
pickups for your portfolio.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.