It's important to keep track of the moves by insiders, as they
can point you in the direction of undervalued (or overvalued)
stocks. I like to scan the recent buying and selling lists from
insiders either daily or weekly, but a monthly look is also
helpful, as it lets you see a steady accumulation of shares over a
period of time.
As the end of September has come and October begins, I decided to
take a look at the most significant purchases. I focused on the 26
companies that saw at least $1 million in insider buying this past
month. Looking at the list, no real theme emerged as these
companies tend to operate in a wide range of industries. Let's take
a closer look at a few of the names.
Hain Celestial (Nasdaq: HAIN)
As we've seen before with the case of
fund investor Carl Icahn never makes a small bet. [
Carl Icahn's Favorite Stock
I noted that Motorola was Carl Icahn's favorite stock, but Hain
Celestial may be a close second. Icahn has been steadily buying
shares of this health food and tea maker on the open market, and
just bought another $30 million worth in September. Curiously, he's
been buying shares even as they have been steadily rising. (Insider
buying is more often associated with beaten-down stocks).
This is an unusual growth story. The company has a long history of
acquisition, helping to boost sales +10% to +20% most years. But in
the absence of acquisitions, organic growth has been very small.
And investors tend to avoid growth-though acquisition strategies
because they don't always boost the
. Indeed, Hain Celestial's
has hovered between $0.50 and $1 for most of the last eight years.
Recent trends have become a bit more favorable. Per share profits
are likely to rise more than +25% to around $1.30 this year, but in
the absence of more deals , profit growth is expected to slink back
to single-digits next year.
From Mr. Icahn's perspective, near-term profits may not be the
litmus test. Instead, he likely sees an asset that is being built
that would ultimately make a nice fit for a larger food maker such
, Nestle or
. But that's a risky strategy. Who knows if such a deal will
materialize? Hain Celestial looks only modestly undervalued by
traditional investment metrics, so anyone looking to ride along
with Mr. Icahn may be counting on him to do some cage-rattling to
unlock shareholder value, as he has done with Motorola.
Exar (Nasdaq: EXAR)
In a similar vein, legendary investor George Soros is placing a
rising pile of bets on chip maker Exar. He bought another $10
million in stock in September, pushing his total holdings above $25
million, or roughly one-tenth of the entire company. Unlike Carl
Icahn, George Soros doesn't apply pressure to the companies in
which he invests, and instead typically takes a passive role.
Exar, which makes a range of chips used in telecom, data storage
and power management environments, has been a decent growth story
in recent years. Sales for fiscal (March) 2011 are on track to rise
at a double-digit pace for the fourth straight year.
Yet even as sales have been rising, bottom line results have not
followed suit. Exar has not been profitable since fiscal 2007.
Shares had rebounded in the last year on hopes that the company
would finally generate high enough gross margins to push profits to
the bottom line. Recent weak quarterly results dashed those hopes,
pushing shares down from $7.50 to under $6 in the past six months.
They're not likely to fall too much further than that -- Exar has
almost $5 in cash, and shares trade slightly below
of $6 per share.
Those kind of metrics enable Mr. Soros to keep from worrying about
the position, even as the company is not expected to finally move
back into profitability until the
that beings next April. Jonathan Moreland, who runs
insiderinsights.com thinks investors won't need too much patience:
"Management's cost-cutting moves should help Exar to start posting
even more quarters in the black in the coming year."
This looks like a safe value play with moderate upside, unless Mr.
Soros suspects that Exar might find a home at a larger tech firm
and be bought out at a nice premium.
Medivation (Nasdaq: MDVN)
Investment firm QVT Associates is backing this former highflying
biotech. Medivation was a rising star in 2009 on the heels of a
promising drug that appeared to effectively treat prostate cancer.
Shares soared last fall as investors anticipated and then received
word of a lucrative marketing deal that pushed shares to nearly
But in early March, the company released Phase III clinical data
that proved disappointing, sending shares down -70% in just one
At this point, analysts are divided as to where the stock goes from
here. Medivation has a few more clinical trials underway that are
still showing promise in the treatment of Huntington's disease and
Alzheimer's disease. But analysts at Brean Murray predict that
Medivation will stumble in these trials as well and shares will
eventually fall to $6. Analysts at Global Hunter think the pipeline
still holds a great deal of promise, and that shares are worth $16.
Clearly the recent heavy insider buying from QVT, which owns more
than 10% of the company, implies that upside could be far higher.
Office Depot (
This stock caught my eye, even as it sat at the bottom of this
list, as a cluster of insiders stepped up to the plate. I profiled
this office supply chain a few weeks ago and even though shares are
up more than +10% since then, they still look to have some pretty
significant upside. Please re-visit that column for a fuller look
at why I'm a
on Office Depot. [Read: "
Insiders are Scooping Up These 3 Retails Stocks
Action to Take -->
Following stocks with heavy insider buying takes a good bit of
follow-up work. The motivations behind those purchases aren't
always clear, so it pays to listen to recent conference calls to
glean hints of positive developments that most investors may be
missing. Of these stocks profiled here, I remain an especially
strong fan of Office Depot as it is quite cheap and
highly-leveraged to an eventual increase in employment. Medivation
remains a stock to heavily research before making any commitments
and is only suitable for risk-tolerant investors, while Exar looks
to have the best combination of value and upside.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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