Insider Buying in Microcaps: Follow the Leader or Ignore the Misleading?

by: Danny Furman

Insider buying is one thing The Motley Fool, Robert Prechter, Jim Cramer and Peter Schiff would likely all agree is bullish, all else ignored, for a particular stock. It is also something we haven't seen much of lately, from industrials to retailers to natural resource companies. In fact, during November and December of 2009, when markets were still rallying hard prior to the recent leveling off, insider selling was outpacing insider buying by as much as 80+-to-1. The most recent numbers are closer to 5-to-1, more due to lack of insider activity than a robust surge in buying.
Somewhat surprisingly, in recent weeks there has been a relative slew of insider buying in several microcaps I follow. I did not screen for insider transactions, or anything for that matter, to compile this list. The following are all companies that have appealed to me along the way for various fundamental reasons and have been on my watch-lists for months. Still, insider buying is something that can make a knowledgeable investor behave like an obedient puppy, following his master to financial demise. Microcaps are still microcaps, meaning investors should consider even the most financially sound and fundamentally promising small companies as high risk, not just high reward propositions.

Brazil Fast Food Corp (OTCPK:BOBS): With two directors already owning over 25% of the outstanding shares, there was reason to believe insiders were confident in this company prior to recent buying. As a franchiser and operator of various fast food chains in Brazil, BOBS.OB strikes me as the right business in the right market. Brazilians are active and competitive, meaning high demand for fast, high-calorie food. With the upcoming Olympic Games and World Cup, tourists too will seek comfort in familiar feeding grounds. Profitability remains in question, however growth is surely evident for BOBS.OB.

Javelin Pharamceuticals (JAV): Myriad Pharma (NASDAQ:MYRX) recently announced the acquisition of JAV, which has two late stage 3 pain drugs awaiting approval for commercialization. Ultimately this is a case in which I accept my role as the dog blindly following the director, but I have a few reasons to believe this is a good medium term investment. Javelin is currently valued under $100M, a relatively low number for a company with two stage 3 candidates and zero threat of dilution thanks to the MYRX buyout. There is also chatter about litigation on behalf of JAV shareholders, claiming the buyout terms are unsatisfactory. Still, what has me convinced is that directors have poured about $500,000 into JAV stock in recent weeks.

Searchmedia Holdings (IDI): IDI owns and operates billboards and elevator advertising space in China. Like BOBS.OB, this Amex traded ADR doesn't have financial information as readily available as I'd like, but what has been reported is very encouraging. Net income is over $10 million for the last two reported quarters and cash flow has been positive despite a growing AR, now almost equal to IDI's market cap. With a new CEO and half a dozen sizable insider buys this year, all this stock seems to lack is trading volume.

Disclosure: Long JAV, IDI