Insider Confidence Makes E*Trade a Buy

As part of our ongoing educational Wealth Daily series, including How to Invest in LEAPS, How to Invest in Options, and Lockup Expirations I wanted to bring your attention to insider buying trends... and, specifically, how to spot trends with bullish insider and billionaire buying.

Let's start with E*Trade (ETFC).

What I like most about this company is the insider buying momentum that followed the stock's triple digit one-month move. It speaks volumes on confidence, and explains the recent surge in option volume.

Sure, the stock took a major dive in 2007, but that's because it got itself involved in a business it shouldn't have been in — subprime.

But like I said, there's insider confidence. About 10 insiders are betting heavily that E*Trade Financial will turn itself around this year.

• Hayter, director 4,917 at $4.06
• Layton, director 245,800 at $4.06
• Fisher, director 31,806 at $4.06
• Randall, director 29,500 at $4.06
• Parks, director 24,586 at $4.06
• Raffaeli, director 12,293 at $4.06
• Lilien, acting CEO 7,376 at $4.06
• Weaver, director 68,843 at $4.06
• Brewster, director 24,586 at $4.06
• Willard, director 11,942 at $3.98 and 13,058 at $3.99

Fortunately, as highlighted by insider moves, there's a good chance the bad news has been factored in. Yes, they posted a loss after a $2.2 billion charge related to the sale of the asset-backed securities portfolio, but the company also unveiled a turnaround plan that could return the company to profitability this year.

Better still, bullish moves have already been made by the company. In November 2007, for instance, the company sold a part of their mortgage portfolio to Citadel Investment, and secured $2.55 billion cash infusion.

Plus, it's exiting its institutional trading business, which means it'll have more time to focus on retail banking and brokerage operations — something it should have been doing all along.

As for potential upside, a near-term fill of the $8 gap isn't out of the question, considering low valuations and attempts at a turnaround.

Another way to profit from insider buying is to follow the billionaires, excluding Warren Buffett. That's because every one follows Buffett.

Following the Billionaire Buyers

Just why did Carl Icahn buy 2.74 million shares of Biogen Idec (BIIB) for $146.5 million in mid August 2007?

Investors believed that, given Icahn's medical background, it may have had something to do with the perceived success of Tysabri, the controversial multiple sclerosis drug that was pulled from the market after some users developed a deadly brain disease. Tysabri, according to some estimates, could be a $1 billion MS drug by 2010. And should it be approved for Crohn's disease, there's even more upside potential.

As an investor, Icahn may have viewed BIIB as an undervalued buyout target. The company was trading at a paltry 37 times earnings, as compared to the 48 times earnings it traded at prior to Tysabri's withdrawal.

Had you followed Icahn and bought around $55, you would've had a $30 gain two months later.

Who was I to argue with billionaire logic? This was the same man who increased his stake in MedImmune by 50% before it was sold to AstraZeneca for $15 billion, doubling MedImmune's market value.

In any case, when a billionaire goes shopping, pay close attention. They didn't make their money by investing in just anything . . .

As Brian Hicks told you the other day, he and I used to follow media tycoon Sumner Redstone, another multi-billionaire, as he bought Midway Games and WMS Industries in the open market.

Midway Games (MWY) quadrupled in value in 2003 going from $3 a share to $12 a share.

WMS Industries (WMS) went from $12 to $21 inside of six months.

It's not every day a billionaire plunks down millions… even billions for stock in a company. These people are in the know, and don't have time or money to waste on losers, which is why we're excited about another favorite billionaire that just acquired a three million share stake in a natural gas company that we talk about here.

Disclosure: None

Comments

[fxtrader07:]

"heavy insider buying"??? are you kidding? apart from the fact that these may be concerted buys to suck people like you in, the numbers are not impressive at all
apart from that etfc will be shocking people when they have to report how many customers they have lost over the past weeks.
certainly, there are way better and lower risk insider plays out there.
and lo and behold - the author himself seems not quite willing to put his money into etfc

2008 Feb 15 09:22 AM

[dan clue:]

I have 40,000 shares of Etrade because I believe in the company and sure I will get a huge payoff within a year. Customers come and go each day from any business but Etrade has everything I need. It has direct deposit; I can pay my bills online, transfer money from my bank account to my brokerage account with ease, free ATM fee’s, all that while I make money. Etrade is the future for investors like me.

I still believe Etrade will be acquired in the coming months, but if they are not I know it will be higher come next year. As an investor I plan long-term growth. One can complain all about the numbers of last year, just remember this is a new year and the share price will go up know matter how many rogue Analysts try to destroy Etrade's brand image and shake customer confidence. I'm here to stay and I have deaf ears when it comes to Analysts. I believe Citigroup is getting what they deserve when it employ’s Rogue analysts Bhatia, he clearly has it out for Etrade. The further it’s share price sinks the better. I would sell all my Citigroup.

I also noticed that someone bought over two million shares at open. Does anyone know whom?

2008 Feb 15 03:50 PM

[Tom B:]

"I still believe Etrade will be acquired in the coming months, but if they are not I know it will be higher come next year."

I'm keeping Etrade as a CUSTOMER for now, under the hypothesis that they'll somehow squeak by or they'll be acquired. I'd hate to jump to another broker only to find out THEY had troubles, too.

2008 Feb 15 05:04 PM

[Learner:]

Comments please, on tonights ETFC insider assassin sale. I am completely puzzled!

2008 Feb 15 10:34 PM

[Learner:]

Further research: The Form 4 indicates the filing was related to taxes associated with restricted stock 2/13/07 and 2/15/06 respectively.

I'm not 100% on this - don't really know what the bottom line is i.e. did the insiders sell or not, and if they did, were they required to by SEC or was it voluntary, or is this simply a mandatory declaration required by the SEC...

It matters a great deal - I believe the market wants ETFC to win and turn around - lots of pent-up emotions riding with varied cost basis - billions betting for a turnaround play.

What say you?

2008 Feb 15 11:06 PM

[CrossProfit:]

Ian,

1)The amount of shares bought by insiders at these prices is of no consequence as they can issue themselves more shares at $0 on a 1 to 1 basis. This would bring down the average price to $2.03 per share.

2) Billionaires have deep pockets. After a billionaire purchases a million shares or two, they usually wait to average down. You never know up front if they were counting on this method. If so, by the time they make the third or fourth purchase, you are already out of cash. If the public starts buying tons on margin, there will be a margin call. You shouldn't try to play this game as you do not have the same resources and you will only get burned.

Disclosure: Opinion of a CrossProfit analyst (topic is not related to website).

2008 Feb 17 04:26 PM

[CrossProfit:]

SA just posted a good article regarding following billionaires in general.
See:
seekingalpha.com/artic...

2008 Feb 18 03:34 PM

[traderv:]

I've made readers good money following Icahn, especially with WMS and MWY.

2008 Feb 19 03:05 PM