Company executives and insiders sell their shares for a variety of reasons. Personal expenditures, taxes, or philanthropic endeavors are just some of the reasons. The sales often have little to do with their beliefs about the company's future, even if the market chooses to interpret them as such. But insiders usually buy their company's shares for just one reason: They expect the share price to rise. Insiders have a unique perspective on what is truly going on at a company. As a result, their purchase activity is carefully scrutinized. We would like to highlight two companies that we believe have good insider-buying trends, which should bode well for their stock prices. We present these companies so that investors may have a point of reference in conducting research on which companies they should invest in.
Valeant Pharmaceuticals (VRX)
Valeant Pharmaceuticals is a Canadian pharmaceutical company that specializes in a variety of disease areas, including dermatology and neurology. Year to date, the stock has lagged the S&P 500 (NYSEARCA:SPY), advancing just over 2% compared to the S&P 500's rise of under 5%.
The stock has dropped steeply in May, as Valeant posted first-quarter earnings May 3. While the report was initially followed by a rally, the stock has reversed course since then and fallen sharply as the market has cooled to Valeant's rosy assumptions for the rest of 2012.
At least one insider at Valeant disagrees. ValueAct Capital is one of the company's largest investors and holds a seat on Valeant's board of directors. In a four-day period between May 17 and May 21, ValueAct purchased 850,000 shares of Valeant at prices between $48.75 and $47.16. ValueAct is not the only Valeant insider to be buying shares. Director Laurence Paul bought 5,000 shares on May 18, and another 5,000 shares on May 14. In addition, CFO Bradley Schiller bought over 9,000 shares in March. There has been limited insider selling at Valeant in the past few months, suggesting that insiders are confident about the stock's trajectory. For the record, the Reuters average price target for shares of Valeant Pharmaceuticals currently stands at $61.88, implying upside of 29.62% as of this writing.
Genworth Financial (GNW)
Genworth Financial is an insurance company that was hit hard during the financial crisis. Its stock has lost 85% of its value in the past five years as the company was battered by mortgage and financial losses. The stock has lost almost a fifth of its value this year as the company attempts to turn its business around and deals with pressure from hedge fund manager John Paulson. CEO Michael Fraizer resigned at the start of May after halting plans for an IPO of the company's Australian unit.
Insiders, however, seem to have a more positive view of the company, and the amount of insider buying going on serves to highlight the confidence that managers and directors seem to have about Genworth's future. Director James Riepe bought 45,000 shares on May 21, at a price of $5 per share. Director James Park bought 25,000 shares on May 18. And interim CEO and CFO Martin Klein bought 15,000 shares on May 9 at a price of $5.60. There only major insider sale at Genworth in the past several months has been from Peter Joelson, the company's chief investment officer, who sold 16,446 shares on March 1. Although Genworth's stock has suffered in 2012 (to say nothing of its performance over the past five years), the company's leaders are confident about its future and are voting with their wallets. For the record, the Reuters average price target for Genworth Financial is $9.69, implying upside of 81.46% from current levels.
The stocks of both Valeant Pharmaceuticals and Genworth Financial dropped sharply before insiders stepped in to buy the shares. Do these insider buys signal a bottom in the stock? Possibly. While each individual investor will need to do some more research to see if either of these companies belong in his or her portfolios, it seems that the executives and directors of Valeant Pharmaceuticals and Genworth Financial believe that their respective stocks are good buys at these levels. And unlike many insiders who simply appear on television and say that their stocks are undervalued, these insiders are voting with their wallets by buying thousands of shares of their companies. There is little more insiders can do to show the market that they are confident about their company's future than to buy the shares.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.