The stocks covered in this article have had a significant increase in insider ownership. On average, these five companies have had an over 124% increase in insider ownership in the past six months. Corning Inc. (NYSE:GLW) has the highest growth in insider ownership at 415.2% while Citigroup, Inc. (NYSE:C) has the lowest, yet significant, at 20.56%.
Insiders are not allowed to buy their own stock based on material non-public information. On the other hand, insiders may have a better perspective on the company's prospects. There is an old saying about insider buying. There are many reasons insiders sell and only one reason they buy, the stock is going up. Additionally, the five stocks have strong fundamental data and some have actually beat recent earnings estimates. The stocks covered have forward P/E ratios of less than 10.
The question is, is it really time to buy or sell? A stock that appears to be a buy based on increased insider buying and fundamentals, but has no near term catalyst could still be dead money for quite some time. The fundamentals trap investors into buying the stock and it never improves. Sector, industry or company specific headwinds that have not yet been factored into current prices may be on the horizon. Furthermore, the insiders may be eyeing the stock through rose colored glasses. You cannot rely on one aspect of a stock to determine whether it is time to buy or sell. You have to consider the stock and the macro environment as a whole.
In the following sections, we will perform a review of the fundamental and technical state of each company. Additionally, we will discern if any upside or downside potential exists based on sector, industry or company specific catalysts. The following table depicts summary statistics and Thursday's performance for the stocks.
Bank of America Corporation (NYSE:BAC)
BAC insider ownership has increased by 75.89% over the past six months. The company is trading 22% below its 52-week high and has 18% upside potential based on the analysts' consensus mean target price of $9.33 for the company. BAC was trading Thursday at $7.94, up almost 1% for the day.
Fundamentally, BAC has several positives. The company has a forward P/E of 8.46. BAC is trading for 5.99 times fee cash flow. BAC has a net profit margin of 11.62% and a PEG ratio of 1.19. BAC is trading for approximately one-third of book value. EPS next year is expected to rise by 66%.
Technically, BAC is exhibiting positive characteristics. The stock just recently broke out of a descending triangle to the upside. This is extremely bullish. The coveted golden cross was just achieved by the stock. This is when the 50-day SMA crosses above the 200-day SMA and is considered extremely bullish.
The stock has continued to rise in the face of macro headwinds. This tells me the bad news has been priced in to the stock. If you want to reduce risk further wait for the stock to breach and hold above the $8.20 high mark set in June for one week to confirm the uptrend. Nevertheless, I say it is a buy right now.
Citigroup insider ownership has increased by 20.56% over the past six months. The company is trading 25% below its 52-week high and has 38% upside potential based on the analysts' consensus mean target price of $39.56 for the company. Citigroup was trading Thursday for $28.88, up slightly for the day.
Fundamentally, Citigroup has several positives. The company has a forward P/E of 6.39. Citigroup is trading for approximately half of book value. The company has a PEG ratio of .96 and a net profit margin of 14.19%.
Technically, the stock has begun to break out of a long-term downtrend. The 20-day SMA just crossed above the 50-day SMA which is a positive sign. The stock has posted higher highs and higher lows since mid-July.
Just like BAC, Citigroup seems to have shirked off the bad news and headwinds lately. Investors seem to be realizing the value in Citigroup. The eurozone crisis has fallen out of the headlines recently. This could be one reason the banks are beginning to melt up. I say anytime you can get Citigroup under $30 do it. The stock is a buy.
Ford Motor Co. (NYSE:F)
Ford insider ownership has increased by 30.89% over the past six months. The company is trading 25% below its 52-week high and has 45% upside based on the analysts' consensus mean target price of $13.96 for the company. Ford was trading Thursday for $9.62, up over 1% for the day.
Fundamentally, Ford has several positives. The company has a forward P/E of 6.33. Ford is trading for 7.85 times free cash flow and 2.40 times book value. EPS next year is expected to rise by 19%. The company pays a dividend with a yield of 2.11% and has a PEG ratio of 0.29 and a net profit margin of 13.28%.
Technically, Ford is improving. The stock is up nearly 10% since my last recommendation to buy at the $9 low. The stock has posted higher highs and higher lows since the start of August. The stock is trading slightly above the 50-day SMA currently.
I like the fact that Ford is focused on the future. Ford is planning to debut 5 battery-powered vehicles this year and forecasts electric/hybrid cars could make up as much as 25% of sales by 2020. Ford is bringing battery research in house and hiring dozens of new engineers to concentrate electric vehicle development. All these developments bode well for the stock. Ford is a buy here.
GLW insider ownership has increased by 415.2% over the past six months. The company is trading 25% below its 52-week high and has 23% upside based on the analysts' consensus mean target price of $14.33 for the company. GLW was trading Monday for $11.68, up almost 1% for the day.
The company has many fundamental positives. The company has a forward P/E of 8.16. GLW has a net profit margin of 28.58%. GLW trades at a 20% discount to book value. The company pays a dividend with a 2.58% yield. GLW is trading for 24 times free cash flow.
Technically, the stock looks poor. The stock has been in a long-term downtrend for the past year. GLW is trading 10% above its 52-week low. The stock has made some progress in recent weeks by braking above the 20 day SMA.
Apparently, there has been a down turn in TV pricing. The pain caused by a weak TV market has caused Sony (NYSE:SNE), Samsung (OTC:SSNLF), Panasonic (PC), and LG to significantly lower their 2012 sales targets. Sony's target has dropped by 4M to 15.5M, and Samsung's by 10M to 40M. This news does not bode well for GLW. This is a change in stance for me regarding GLW. I see GLW a value trap currently and would avoid the stock.
Xerox Corp. (NYSE:XRX)
XRX insider ownership has increased by 78.53% over the past six months. The company is trading 17% below its 52-week high and has 14% upside potential based on the analysts' consensus mean target price of $8.31 for the company. Xerox was trading Thursday for $7.34, up over 1% for the day.
Fundamentally, Xerox is solid. The company has a forward P/E of 8.04. The company is trading for 77% of book value. Xerox sells for 8.61 times free cash flow. Xerox's EPS growth rate was over 100% this year, yet next year looks gloomy at a mere 8%. The company pays a dividend with a yield of 2.35%.
Technically, the stock is in a long-term down trend. On the other hand, the stock has made significant progress over the last month posting higher highs and higher lows on its way to piercing the 50 day SMA.
Deutsche's Chris Whitmore estimates top printer vendors, including Hewlett-Packard Company (NYSE:HPQ), Lexmark (NYSE:LXK), and Xerox have seen their sales fall at a 6% annual clip over the last 10 quarters. The depressed valuations assigned to the group show Whitmore is far from alone in being this pessimistic. Whitmore sums up the long-term threat the printing industry is staring by stating "The content that was once printed for distribution or portability is now simply being distributed or shared electronically."
Xerox has seen the writing on the wall and is struggling to transform itself from a printer company to a services company. I applaud them for their foresight; nevertheless, I am not sure the risk/reward ratio favors going long at this time. I have the stock in the trap camp until a strong positive catalyst presents itself. Avoid the stock for now.
The Bottom Line
Sometimes a bargain is bargain and sometimes it is not. Starting off with stocks that have strong insider ownership growth and solid fundamentals takes some of the downside risk out of the equation; nevertheless, you must always dig deeper to see what the future may hold. Everything is not always as it appears.
Most of these stocks are in the process of rebounding off a bottom. The difference is XRX and GLW seem to be facing headwinds rather than catalysts. Furthermore, their technical state is not as strong as I would like to see it. If I had to pick one stock out of these to buy it would be Ford. The risk/reward ratio is extremely positive and the stock pays a 2% dividend to boot.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis at a minimum to reduce risk and setting a 5% trailing stop loss to minimize losses even further.