By David Sterman
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 these transactions.
Here's a look at three companies that have seen heavy recent insider buying.
Weatherford International (NYSE: WFT)
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 Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL). Weatherford possesses the strongest projected profit growth of the three, and shares trade for just 14 times projected 2011 profits.
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 and elsewhere.
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 years, Weatherford's EBIT (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. Last, 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 prices.
Chico's F.A.S. (NYSE: CHS)
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 share (EPS) north of $1.25. Not bad for a stock under $10.
VMWare (NYSE: VMW)
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 EPS 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 EMC (NYSE: EMC), 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.
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.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.
Originally published on July 22, 2010