It's important to keep track of the moves by insiders, as they can point you in the direction of undervalued (or overvalued) stocks. I like to scan the recent buying and selling lists from insiders either daily or weekly, but a monthly look is also helpful, as it lets you see a steady accumulation of shares over a period of time.
As the end of September has come and October begins, I decided to take a look at the most significant purchases. I focused on the 26 companies that saw at least $1 million in insider buying this past month. Looking at the list, no real theme emerged as these companies tend to operate in a wide range of industries. Let's take a closer look at a few of the names.
I noted that Motorola was Carl Icahn's favorite stock, but Hain Celestial may be a close second. Icahn has been steadily buying shares of this health food and tea maker on the open market, and just bought another $30 million worth in September. Curiously, he's been buying shares even as they have been steadily rising. (Insider buying is more often associated with beaten-down stocks).
This is an unusual growth story. The company has a long history of acquisition, helping to boost sales +10% to +20% most years. But in the absence of acquisitions, organic growth has been very small. And investors tend to avoid growth-though acquisition strategies because they don't always boost the bottom line. Indeed, Hain Celestial's EPS has hovered between $0.50 and $1 for most of the last eight years.
Recent trends have become a bit more favorable. Per share profits are likely to rise more than +25% to around $1.30 this year, but in the absence of more deals , profit growth is expected to slink back to single-digits next year.
From Mr. Icahn's perspective, near-term profits may not be the litmus test. Instead, he likely sees an asset that is being built that would ultimately make a nice fit for a larger food maker such as Kraft (NYSE: KFT), Nestle or Conagra (NYSE: CAG). But that's a risky strategy. Who knows if such a deal will materialize? Hain Celestial looks only modestly undervalued by traditional investment metrics, so anyone looking to ride along with Mr. Icahn may be counting on him to do some cage-rattling to unlock shareholder value, as he has done with Motorola.
Exar (Nasdaq: EXAR)
In a similar vein, legendary investor George Soros is placing a rising pile of bets on chip maker Exar. He bought another $10 million in stock in September, pushing his total holdings above $25 million, or roughly one-tenth of the entire company. Unlike Carl Icahn, George Soros doesn't apply pressure to the companies in which he invests, and instead typically takes a passive role.
Exar, which makes a range of chips used in telecom, data storage and power management environments, has been a decent growth story in recent years. Sales for fiscal (March) 2011 are on track to rise at a double-digit pace for the fourth straight year.
Yet even as sales have been rising, bottom line results have not followed suit. Exar has not been profitable since fiscal 2007. Shares had rebounded in the last year on hopes that the company would finally generate high enough gross margins to push profits to the bottom line. Recent weak quarterly results dashed those hopes, pushing shares down from $7.50 to under $6 in the past six months. They're not likely to fall too much further than that -- Exar has almost $5 in cash, and shares trade slightly below book value of $6 per share.
Those kind of metrics enable Mr. Soros to keep from worrying about the position, even as the company is not expected to finally move back into profitability until the fiscal year that beings next April. Jonathan Moreland, who runs insiderinsights.com thinks investors won't need too much patience: "Management's cost-cutting moves should help Exar to start posting even more quarters in the black in the coming year."
This looks like a safe value play with moderate upside, unless Mr. Soros suspects that Exar might find a home at a larger tech firm and be bought out at a nice premium.
Medivation (Nasdaq: MDVN)
Investment firm QVT Associates is backing this former highflying biotech. Medivation was a rising star in 2009 on the heels of a promising drug that appeared to effectively treat prostate cancer. Shares soared last fall as investors anticipated and then received word of a lucrative marketing deal that pushed shares to nearly $40.
But in early March, the company released Phase III clinical data that proved disappointing, sending shares down -70% in just one day.
At this point, analysts are divided as to where the stock goes from here. Medivation has a few more clinical trials underway that are still showing promise in the treatment of Huntington's disease and Alzheimer's disease. But analysts at Brean Murray predict that Medivation will stumble in these trials as well and shares will eventually fall to $6. Analysts at Global Hunter think the pipeline still holds a great deal of promise, and that shares are worth $16. Clearly the recent heavy insider buying from QVT, which owns more than 10% of the company, implies that upside could be far higher.
Office Depot (NYSE: ODP)
This stock caught my eye, even as it sat at the bottom of this list, as a cluster of insiders stepped up to the plate. I profiled this office supply chain a few weeks ago and even though shares are up more than +10% since then, they still look to have some pretty significant upside. Please re-visit that column for a fuller look at why I'm a bull on Office Depot. [Read: "Insiders are Scooping Up These 3 Retails Stocks"]
Action to Take --> Following stocks with heavy insider buying takes a good bit of follow-up work. The motivations behind those purchases aren't always clear, so it pays to listen to recent conference calls to glean hints of positive developments that most investors may be missing. Of these stocks profiled here, I remain an especially strong fan of Office Depot as it is quite cheap and highly-leveraged to an eventual increase in employment. Medivation remains a stock to heavily research before making any commitments and is only suitable for risk-tolerant investors, while Exar looks to have the best combination of value and upside.