Recent Insider Buying A Strong Indicator For Investors To Buy?

by: Brian Gorban

As I discussed in my recent article here, there are many factors I screen for prior to making a stock purchase. One strong factor I look for is insider purchases as those are not only the people with the best view of the company's upcoming business prospects, but it's also nice when they have their financial interests aligned with us investors. Here are some stocks with those attributes:

Newcastle Investment (NCT) operates as a real estate investment and finance company that invests in and manages, a portfolio consisting primarily of real estate securities. On Sept. 22, CEO and President Ken Riis bought a big 150,000 shares at $4.55. I recently wrote here about the favorable valuations of a few mREITs and on the surface NCT seems to fit that bill, trading at a very small .5x price/earnings and under 1x price/sales. However, the company trades at a lofty 3x price/book when most mREITs are trading at 1x or below and earnings were significantly enhanced by non-recurring benefits this past year. Moreover, while the dividend was raised 50% this past quarter, that was after suspending it for almost three years. It's great to see this large insider purchase, but with other great mREITs, such as Chimera (NYSE:CIM), Annaly (NYSE:NLY), and American Capital (NASDAQ:AGNC) trading at favorable valuations, I'd rather be a buyer of those for now.

Metalico (NYSEMKT:MEA) through its subsidiaries, engages in scrap metal recycling and lead metal products fabricating activities primarily in the United States. On Sept. 23, Board director Walter Barandiaran bought 100,000 shares at $3.88. The company's valuations look compelling trading at 10x price/earnings, .3x price/sales, and just over 1x price/book. I think this company is a buy here at $4 as the company looks to be rebounding much like the two companies I mentioned here.

VMware, (NYSE:VMW) provides virtualization and virtualization-based cloud infrastructure solutions primarily in the United States. On Sept. 26, major shareholder EMC, bought a massive 274,249 shares at $84.22. The stock is definitely not for the value investor though trading at over 70x price/earnings, 11x price/sales, and almost 9x price/book. The company does have very strong margins and revenue growth, but with it priced for perfection, I don't see much, if any, margin of safety so I have to avoid this stock for now.

Clearwire (CLWR) provides wireless broadband services. The company builds and operates mobile broadband networks that provide high-speed mobile Internet and residential access services, as well as residential voice services in communities in the United States. On Aug. 26, board director Jose Collazo bought 36,000 shares at $2.35 and later in the day proceeded to buy an additional $36,000 shares at $2.75. The stock trades at under .7x price/book and price/sales, but lost $650 million this prior year and has approximately $4 billion in debt. It has been having big price swings recently on whether partner Sprint (NYSE:S) will buy it out and now China Mobile (NYSE:CHL) has been rumored as well, but with that being the only real catalyst, I have to stay away from this stock.

CompuCredit Holdings (CCRT) provides credit and related financial services and products to the underserved consumer credit market, a market represented by credit risks that regulators classify as sub-prime, in the United States. On Sept. 23, CFO Paul Whitehead bought 37,700 shares at $2.83. The stock looks compelling trading at .35x price/sales and .8x price/book. The 1x price/earnings is misleading though as that is largely due to a one-time gain from discontinued operations. Nonetheless, management seems to have returned this company to consistent profitability and cleaned up the balance sheet well. I think this is a buy here matching Whitehead's purchase price of $2.83.

OPKO Health (NYSEMKT:OPK) is a pharmaceutical and diagnostics company that engages in the discovery, development, and commercialization of novel and proprietary technologies primarily in the United States, Chile, and Mexico. On Sept. 26, Chairman and CEO Phillip Frost bought 10,000 shares at $4.33 bringing his total purchases so far in the month of September to 55,000 shares. I discussed my thoughts about the stock recently here and my thoughts haven't changed.

Towerstream (NASDAQ:TWER), a 4G service provider, delivers high-speed wireless Internet access to businesses in the United States. On Sept. 22, board director Howard Haronian bought 15,000 shares at $2.89. I don't quite see much value in the stock though as it trades at almost 7x price/sales, lost over $5 million in the trailing twelve months, and trades over 3x price/book. The over $16 million in net cash with almost no debt is encouraging to see, but this company seems to continue to burn cash so I'd avoid this stock.

Sources: Yahoo, Guru Focus, and SEC filings

Disclosure: I am long CIM, NLY.