Seeking Alpha
Biotech, insider ownership, small-cap, long-term horizon
Profile| Send Message|
( followers)  

There is a reason why investors love to watch insider purchases. When a company insider unnecessarily adds to his holdings, this can often be a very compelling reason for investors to keep their eyes on the corresponding company stock. Open market purchases can often express this qualification as they do not reflect a timed expiration of exercised options or warrants. There is also a common adage that gives credence as to why investors should watch insider purchases in particular. This thought is that while there are many reasons for insiders to sell their shares, there are often very few reasons to buy shares apart from an expectation of future value to come about from the transaction.

As the head of the company, the Chief Executive Officer tends to be the one who is most familiar with the company's everyday operations. Therefore, when a CEO buys his own company's stock, it can often be a strong symbolic commitment from the one in charge. A recent case to illustrate this concept may be found in rare earth producer Molycorp (MCP). The company had originally been hit with the surprise news that the U.S. Securities and Exchange Commission was looking into the company in an investigation over the accuracy of the Company's public disclosures as seen in my article found here. Yet as the company's stock plunged, CEO Mark Smith helped support the price by buying up shares in the company within days after the news. From his purchase price of $6.20 per share on November 19, the company's stock has since rallied to $10.70 as of December 10, 2012. This quick rebound was largely attributed the confidence found in the CEO's purchase along with those of his fellow officers.

It's for reasons like this that watching the purchases of the company head can often yield a tangible result. But investors should also bear in mind that not every person invests on the same timeframe or rationale as these officers. In the same sense, not every large insider purchase should also be treated with the same level of confidence. A CEO might merely be attempting to gain greater control over the company through ownership for instance even if investors could mistake this as a sign of imminent value to be realized. While in the end only perfect hindsight is able to differentiate between the two, looking for distinctly suspicious transactions can often be beneficial to the investor. Bearing this in mind, let's take a look at some of the more recent large company stock purchases by CEOs. While each of these express a form of value on some level, investors should continue to formulate their own conclusions on the basis of the underlying risks that remain.

Company Name CEO Name Date Shares Price SEC Filing Link
AK Steel Holding Corporation (AKS) James L. Wainscott 11/27/12 100,000 $3.845 Link
Pacific Biosciences of California, Inc. (PACB) Michael Hunkapiller 11/30/12 97,400 $1.7585 Link
Opko Health, Inc. (OPK) Phillip G. Frost 12/07/12 75,000 $4.34-$4.38 Link
PHI Inc. (PHII) Alton Anthony Gonsoulin, Jr. 12/03/12 503,665 $31.78 Link

What make Opko and Pacific Biosciences unique in regards to their insider transactions is the fact that the CEO of each has continued to purchase their respective company's stock in a very aggressive fashion. Since November 13, Pacific Biosciences CEO Michael Hunkapiller has purchased shares of his company on a near daily basis. Through the end of November, his purchases had totaled a value of $1.35 million in a company now sporting a $90.42 million market capitalization.

On the other hand, Dr. Phillip Frost of Opko has been buying large amounts of shares nearly every day for many months. In November alone, the CEO's purchases valued $3.65 million. While Dr. Frost now controls about half of the company's outstanding shares, Opko is far from cheap as it trades with a lucrative market capitalization of $1.33 billion despite a lack of profitability.

AK Steel finds itself in a similar hard-hit situation as Molycorp as the company took a plunge over the latest fourth quarter outlook found here. Within two weeks, CEO James Wainscott proceeded to buy shares on the open market on November 26 as he purchased $385,000 worth of company stock. Along with several insider purchases from other officers and directors, Wainscott appears to be sending a strong buy signal to the investing community.

Last of all, Mr. Alton Anthony Gonsoulin made an unusually large purchase in his company PHI Inc. On December 3, the CEO directly purchased 503,665 shares at $31.78 per share. The value of this transaction came out to $16,006,474. As it stands as of December 10, PHI Inc. trades with a market capitalization of $482.45 million. Prior to the CEO's purchase, the company only had three other insider transactions in 2012. One of these was another purchase by the CEO on September 4, 2012 for $252,394 worth of stock priced between $27.50 - $28.50 per share.

AKS Chart
(Click to enlarge)

AKS data by YCharts

Source: These CEOs Just Made Some Very Bullish Insider Purchases