In recent weeks and months, we've seen a range of companies
report solid quarterly results, yet their shares have steadily
fallen in sympathy with the broader market. More than a few company
executives have grumbled on conference calls that their company's
shares don't get enough respect. But a few of them put their money
where their mouth is, writing large checks to buy shares of their
company on the open market.
Such so-called insider buying can alert you to undervalued stocks
before most investors take note. That's because insiders (defined
as any officer or director of a company, or any investor that owns
more than 5% of the company's stock) have deep insights into how a
business performs. Insiders must file a copy of their activities
with the U.S. Securities and Exchange Commission . Several
websites, including insiderinsights.com and edgar-online.com, track
Here's a look at three companies that have seen heavy recent
Weatherford International (
Insiders at this oil services company started buying up shares last
December, and they haven't stopped since. More than a dozen company
executives have ponied up for shares, with the latest purchase
taking place as recently as July 1.
Weatherford supplies a wide range of services to energy exploration
firms, competing with larger peers such as
. Weatherford possesses the strongest projected profit growth of
the three, and shares trade for just 14 times projected 2011
For Weatherford, it's a tale of two regions. North American
operations have been disappointing, thanks to weak natural gas
prices. But international business is booming. The company is just
now ramping up in Iraq, Russia, Brazil, Saudi Arabia, Libya, China
That heavy insider buying last winter seemed a bit premature, as
the company would go on to miss earnings forecasts for the fourth
quarter of 2009 and the first quarter of 2010. Now, those insiders
are finally vindicated, as just-announced second quarter results
topped estimates by more than +50%.
Analysts expect Weatherford's profits to rise sharply in 2011, as
profit margins rebound toward recent peaks. During the past five
(earnings before interest and taxes) margin averaged 18%. A lot of
the company's equipment sat idle in 2009, and it fell to just 9%.
This year, that metric should move into the low teens. This is a
very capital-intensive business, and margins can swing sharply if
demand rises even moderately.
Why the brightening outlook? Weatherford acquired BP's stake in TNK
last year to gain greater access to the Russian energy market.
Management concedes that it has been a challenge to integrate TNK
into its operations, but expects to post strong results from that
unit in 2011. In addition, the company has already secured more
than $400 million in contracts in Iraq to help the country rebuild
its energy infrastructure. Lastly, energy exploration efforts in a
range of other countries are expected to rebound in coming
quarters, unless we see another precipitous plunge in global energy
Chico's F.A.S. (
At the depths of the economic crisis, investors in Chico's FAS
became so bearish on this women's apparel retailer that they dumped
shares down to below $2. But Chico's went on to prove its doubters
wrong, pounding out quarter after solid quarter, enabling shares to
climb back above the $16 mark this April.
Since then, investors have booked profits, perhaps because results
for the April quarter simply matched estimates, whereas they had
handily exceeded them in the prior two quarters. Shares fell to
around $12 when those results were announced in mid-May, and a pair
of company vice presidents bought shares in a show of support. They
were premature. Shares now trade for less than $10.
But these insiders are on to something: Chico's looks set to
benefit from further modest sales gains and expanding profit
margins. That's why analysts expect profits to rise roughly +60%
this year, and another +30% in 2011 to $0.92 a share. Looking out
another year or two, the cash-strapped consumer may finally be back
on her feet, and the company thinks it can get operating margins
from the low teens in 2011 to the mid to upper teens by 2012 or
2013, thanks to better merchandising. That could yield earnings per
) north of $1.25. Not bad for a stock under $10.
The term "cloud computing" gets all kinds of buzz these days, but
is still a hazy concept for many investors. It's quite simple,
really. Rather than storing your data on a local server, you can
store it on the Internet, or "the cloud." You can also run vast
computational programs on a string of connected computers,
providing much more processing power than you could ever garner on
your own. This approach is known as virtualization. But it takes
robust software to harness all that, and for many, VMWare is the
vendor of choice.
The cloud opportunity is really gaining force. VMWare just
announced second-quarter sales of $674 million, up from $56 million
last year. And
jumped +70% to $0.34, setting the stage for full-year profits of
around $1.40 per share, or some +40% higher than a year ago.
A key insider has been quite bullish. In this case, the insider is
a company and not a person. Data storage firm
, which owns roughly 30 million shares, or 7% of the company and is
thus considered to be a "beneficial owner," bought about 800,000
more shares from mid-June to mid-July, in a price range of $68 to
$72. Shares at a recent $73 are right near that range. Needham
& Co,'s Scott Zeller thinks VMWare "may still grow revenue 2x
faster than its large-cap peer group in CY11," and believes "the
prospects for private cloud and (virtualization) are strong
drivers." He has an $83 price target, but also notes that his
forecasts appear very conservative.
Action to Take -->
Insiders often arrive at the party early, so these shares may not
get an immediate lift. But over time, patience is typically
rewarded by following the insiders and their moves.
-- David Sterman
David Sterman has worked as an investment analyst for nearly two
decades. He 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 has made numerous media appearances over the years,
primarily on CNBC and Bloomberg TV. David has a master's degree in
management from Georgia Tech. Read More...
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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