Every time the
, you'll notice an
in insider buying. That's because a company's officers, directors
and largest shareholders are looking to pick up
of their company's newly-discounted stock. But the month of
November may have been one for the record books. Insider buying was
really robust, building ever higher as the market ground ever lower
throughout the month.
A quick scan of the Security and ExchangeCommission (SEC) filings
shows dozens of companies that saw insider-buying activity in
excess of $100,000, $500,000 or even $1 million. I've compiled a
list of companies that have seen at least $1 million worth of
insider buying in the past month. I chose to focus on insiders that
bought shares on the open market with their own cash, avoiding
those that simply picked up stock through options grants that were
converted and held -- which is registered as insider buying by some
insider-tracking services. I also removed any names from the list
that have rallied more than 20% above the average price where
insiders acquired shares. This ensures we're only looking at stocks
that are likely still a bargain.
The following list of 18 stocks is a good basis for further
research. Three in particular have caught my eye.
1. Opko Health (NYSE:
The first involves a quick mention of Opko Health, which has been
the recipient of seven-figure buying in almost every month of 2011
by company chairman Phil Frost. As I've noted in past insider
reviews, Frost is surely a man to watch. He already built up
generic drug firm Ivax, which was sold to
Teva Pharmaceutical (Nasdaq:
for more than $7 billion in 2005. (Frost is also chairman of Teva
Ladenburg Thalmann Financial (AMEX:
Could Opko Health be his next home run? Frankly, it's hard to know.
The company maintains a fairly low profile, with stakes in a range
of health care and biotechnology products that are still in the
development phase. Sales are only likely to hit $40 million in
2011, but with a
of $1.4 billion, I'll leave it to readers to figure out why Frost
is still buying stock (and presumably believes it to be still
undervalued after steadily rising throughout 2011). The company
would need to share a lot more details about its
before I'd be comfortable recommending it to investors, but Frost's
track record is enough to get my attention.
2. Chesapeake Energy (NYSE:
This second insider-buying cluster comes from Chesapeake Energy
Chairman Aubrey McClendon and company Director Louis Simpson.
Simpson made the bulk of the buying at a stock price slightly
higher than current levels, which I often look for as a sign of
confidence in the company.
Shares of Chesapeake carry a reasonable degree of risk, as the oil
and gas driller will need to raise more than $1 billion in 2012 to
fund its capital-spending plans. Depressed gas prices make this a
bit of a challenge, which explains why shares are just above the
. Still, once Chesapeake squarely addresses its financing needs,
shares could rise much higher in 2012. My colleague Nathan
Slaughter laid out a scenario where shares could double in the
3. Gentiva Health (Nasdaq:
Insider buying is especially useful at times when a company's
business model and operating prospects are misunderstood.
Buying is also a vote of confidence when businesses carry a lot of
risk and investors don't know where a floor for the share price
resides. This surely applies to Gentiva, a health care provider
which offers home visits (55% of sales) and hospice care (45% of
This stock, along with industry peers, has been hammered in 2011 as
Congress uncovered myriad examples of overbilling to
. In response, reimbursement rates were cut 3% in 2011 and are
slated to fall another 2% in 2012. These health care providers have
likely put in their last specious claim. Amen to that.
Still, that should be the worst of it. Providing out-of-hospital
care is still far more cost-effective. It costs more than $1,000 a
day to care for a patient in the hospital, but home visits cost
just $50 and hospice care costs roughly $125 to $150 per day. It's
in no one's interest to create even more financial pressure on a
company that's providing these lower-cost services.
The industry pressures are bad enough, but Gentiva's woes have been
especially pronounced because the company carries more than $1
billion in debt. To stay inside of increasingly restrictive debt
covenants, the company is in the process of selling a few noncore
And this is where the insider buying comes into play. Insiders
would not be so foolish as to commit their personal funds to buy
company stock if they thought Gentiva would be at high risk of
defaulting on its debt. The company has some breathing room, with
nearly $200 million in cash on hand. And with a projected $100
million in current and future
sales, more money will be coming.
To be sure, all of the reimbursement pressures are having a clear
effect on the
. Per-share profits are likely to fall from about $3 in 2010 to
just $1.60 in 2011, and are likely to reach between $0.80 and $0.90
in 2012. Still, at current prices, shares trade for less than seven
. This is obviously a high-risk business model, but the fact that
eight different insiders have committed nearly $2 million to
company stock implies that investors may be overestimating the
and reimbursement risks.
Risks to Consider:
Insider buying often highlights the way to undervalued stocks,
but these insiders tend to act only when the market appears to be
unfairly tarnishing their company's valuation. Insiders are
notoriously bad market timers and don't have a firm grasp on
external market pressures that can send shares even lower. So it's
best to pursue insider-buying stock ideas for a medium- to
Action to Take-->
All of the stocks in this article have seen massive amounts of
insider buying -- not just a token gesture that says "notice our
stock," but real and significant seven-figure clusters. Insiders
who are willing to take such bold steps highlight when underlying
business conditions are stronger than a lagging stock price
implies. Considering their low prices and heavy insider-buying
activities, any of these stocks could turn out to be profitable
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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