By David Sterman
There are two moves every investor should make at the end of every earnings season. First, look at companies that just announced major stock buybacks; second, look at companies where insiders have been spending their own cash to load up on their company's stock. Both of these actions can only take place after earnings have been released and as the "quiet period" ends.
I recently checked out the major buyback announcements and was hard-pressed to find any deep value signals. Many companies appear to be buying back stock even as their shares trade near multi-year highs, likely due to a lack of other uses of their recently-generated cash. Insiders, on the other hand, are value players, typically buying shares when they appear to be seriously undervalued, not simply because the cash is burning a hole in their pockets.
1. Ultralife (NASDAQ:ULBI)
Long before the battery-powered hybrid car revolution arrived, this company was trying to revolutionize the century-old traditional battery industry. Heavy research and development (R&D ) spending (at what was then known as "Ultralife Batteries") led to a great deal of investor hype leading shares to move above $20 in the mid-1990s. Even though commercial demand proved lacking, the company carved out a nice niche as a supplier to the U.S. military.
Yet in the past few years, the military contracts have started to wane as well, and Ultralife is now on track to lose money for the third straight year. An attempt to diversify away from the core battery business and into a range of communications products used in off-site satellite locations has helped keep revenue from falling at an even faster clip. Still, shares now trade for less than $5 as the company works to stem the red ink and reverse the negative sales trends.
In a bid to change the company's fortunes, the board of directors hired Michael Popielec to serve as the new CEO in December 2010. He got off to a rough start. Quarterly sales had been in the $37-50 million range for six straight quarters before plunging to just $31 million in the first quarter of 2011, roughly $10 million below analysts' forecasts.
Yet Popielec, who has extensive management experience at GE and other industrial firms, looks poised to deliver better results in the quarters ahead. "The New CEO has acted quickly to put his stamp on the company, and we believe there is a solid base to build on," note analysts at Merriman Curhan. Popielec is already cutting costs, employing lean manufacturing techniques he learned at GE and elsewhere.
The analysts at Merriman Curhan think quarterly sales will rebound back into the $40-45 million range, beginning with the current quarter, thanks to an uptick in commercial sales. That is likely to help Ultralife move back into the black. The company generated a $5.8 million operating loss in the first quarter but could generate a cumulative $8 million operating profit during the rest of 2011, according to the analysts. They see that figure rising to $15 million for 2012.
This past week, Popielec purchased 30,000 shares with $120,000 of his own money, likely to re-focus investor attention away from the dismal first quarter. Four separate directors purchased a collective 40,000 shares with their private funds earlier in the week as well. Taken together, these purchases signify that Ultralife may finally be on the road to recovery after a very challenging stretch.
2. General Motors (NYSE:GM)
When Dan Akerson took the reins of GM last September, the company was headed for a heavily-publicized IPO. A few days after the deal was completed in mid-November, he shelled out $500,000 to buy company stock. Though shares initially surged, they eventually pulled back and now trade almost 10% below their first-day closing price. Akerson is undeterred: He bought another 5,000 shares in early March and, just last week, purchased an additional 30,000 shares for nearly $1 million.
The ongoing purchases are a bit curious. Akerson has accumulated a great deal of wealth after leading a series of Fortune 500 firms during the past 25 years. He made roughly $9 million last year, and GM's board recently granted him another $1.3 million in restricted stock. At this point, he doesn't need the money. Instead, his insider buys appear simply to be a vote of confidence. Some analysts agree with his bullishness; Morgan Stanley, for example, sees 50% upside (which I've talked about before.)
Indeed, with crude oil slipping back below $100 per barrel, investor sentiment may start to move back in GM's favor. The company generates especially strong profits on its pickup trucks, sales of which were dampened as oil recently surged past $110 a barrel. Hopes for a rebound in truck sales are now the possible catalyst for GM's shares.
3. Opko Health (NYSEMKT:OPK)
Lastly, Opko Health CEO Phil Frost keeps buying more stock, which I first profiled in early March. Since then, he's picked up almost 5 million more shares of this biotech play. Some of those acquired shares were acquired when Opko conducted a $100 million secondary offering in March. The proceeds are intended to help the company step up its R&D efforts.
Opko, which is focusing on eye-related treatments, remains a below-the-radar play, with little analyst coverage and few media mentions. Presumably, Dr. Frost will eventually shed more light on Opko's prospects, as he has a strong history of courting Wall Street when he needs to, as he did with Ivax before the generic drug maker was acquired by Teva Pharmaceuticals (NASDAQ:TEVA) for $7 billion in 2005.
Insiders can be a bit premature in their efforts, so these stocks may languish for a bit longer. But over time, these insider signals tend to pay off for investors, so it pays to heed their actions.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.