By David Sterman
Every time the market hits an air pocket, you'll notice an uptick in insider buying. That's because a company's officers, directors and largest shareholders are looking to pick up shares of their company's newly-discounted stock. But the month of November may have been one for the record books. Insider buying was really robust, building ever higher as the market ground ever lower throughout the month.
A quick scan of the Security and Exchange Commission (SEC) filings shows dozens of companies that saw insider-buying activity in excess of $100,000, $500,000 or even $1 million. I've compiled a list of companies that have seen at least $1 million worth of insider buying in the past month. I chose to focus on insiders that bought shares on the open market with their own cash, avoiding those that simply picked up stock through options grants that were converted and held -- which is registered as insider buying by some insider-tracking services. I also removed any names from the list that have rallied more than 20% above the average price where insiders acquired shares. This ensures we're only looking at stocks that are likely still a bargain.
1. Opko Health (OPK)
The first involves a quick mention of Opko Health, which has been the recipient of seven-figure buying in almost every month of 2011 by company chairman Phil Frost. As I've noted in past insider reviews, Frost is surely a man to watch. He already built up generic drug firm Ivax, which was sold to Teva Pharmaceutical (TEVA) for more than $7 billion in 2005. (Frost is also chairman of Teva and Ladenburg Thalmann Financial (LTS).)
Could Opko Health be his next home run? Frankly, it's hard to know. The company maintains a fairly low profile, with stakes in a range of health care and biotechnology products that are still in the development phase. Sales are only likely to hit $40 million in 2011, but with a market value of $1.4 billion, I'll leave it to readers to figure out why Frost is still buying stock (and presumably believes it to be still undervalued after steadily rising throughout 2011). The company would need to share a lot more details about its business model before I'd be comfortable recommending it to investors, but Frost's track record is enough to get my attention.
2. Chesapeake Energy (CHK)
This second insider-buying cluster comes from Chesapeake Energy Chairman Aubrey McClendon and company Director Louis Simpson. Simpson made the bulk of the buying at a stock price slightly higher than current levels, which I often look for as a sign of confidence in the company.
Shares of Chesapeake carry a reasonable degree of risk, as the oil and gas driller will need to raise more than $1 billion in 2012 to fund its capital-spending plans. Depressed gas prices make this a bit of a challenge, which explains why shares are just above the 52-week low. Still, once Chesapeake squarely addresses its financing needs, shares could rise much higher in 2012. My colleague Nathan Slaughter laid out a scenario where shares could double in the coming year.
3. Gentiva Health (GTIV)
Insider buying is especially useful at times when a company's business model and operating prospects are misunderstood. Buying is also a vote of confidence when businesses carry a lot of risk and investors don't know where a floor for the share price resides. This surely applies to Gentiva, a health care provider which offers home visits (55% of sales) and hospice care (45% of sales).
This stock, along with industry peers, has been hammered in 2011 as Congress uncovered myriad examples of overbilling to Medicare. In response, reimbursement rates were cut 3% in 2011 and are slated to fall another 2% in 2012. These health care providers have likely put in their last specious claim. Amen to that.
Still, that should be the worst of it. Providing out-of-hospital care is still far more cost-effective. It costs more than $1,000 a day to care for a patient in the hospital, but home visits cost just $50 and hospice care costs roughly $125 to $150 per day. It's in no one's interest to create even more financial pressure on a company that's providing these lower-cost services.
The industry pressures are bad enough, but Gentiva's woes have been especially pronounced because the company carries more than $1 billion in debt. To stay inside of increasingly restrictive debt covenants, the company is in the process of selling a few noncore businesses.
And this is where the insider buying comes into play. Insiders would not be so foolish as to commit their personal funds to buy company stock if they thought Gentiva would be at high risk of defaulting on its debt. The company has some breathing room, with nearly $200 million in cash on hand. And with a projected $100 million in current and future asset sales, more money will be coming.
To be sure, all of the reimbursement pressures are having a clear effect on the bottom line. Per-share profits are likely to fall from about $3 in 2010 to just $1.60 in 2011, and are likely to reach between $0.80 and $0.90 in 2012. Still, at current prices, shares trade for less than seven times forward earnings. This is obviously a high-risk business model, but the fact that eight different insiders have committed nearly $2 million to company stock implies that investors may be overestimating the balance sheet and reimbursement risks.
Risks to Consider: Insider buying often highlights the way to undervalued stocks, but these insiders tend to act only when the market appears to be unfairly tarnishing their company's valuation. Insiders are notoriously bad market timers and don't have a firm grasp on external market pressures that can send shares even lower. So it's best to pursue insider-buying stock ideas for a medium- to long-term period.
All of the stocks in this article have seen massive amounts of insider buying -- not just a token gesture that says "notice our stock," but real and significant seven-figure clusters. Insiders who are willing to take such bold steps highlight when underlying business conditions are stronger than a lagging stock price implies. Considering their low prices and heavy insider-buying activities, any of these stocks could turn out to be profitable value plays.
Disclosure: Neither D. Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.