3 Insider Stocks That Could Pop

As earnings season winds down, insider activity heats up. That’s because insiders (classified as company executives, directors and beneficial owners) get the green light to buy or sell their company’s stock on the open market once earnings have been released. (That window remains open until the quarter has ended). So it’s no surprise to see a recent sharp spike in insider buying.

Earlier this week, I noted that Bill Gates, classified as an insider at AutoNation (NYSE: AN) because of his large investment in the company, has continued to aggressively purchase shares. [Read the article here.]

Let’s take a look at three other stocks with heavy recent insider buying.

Devon Energy (NYSE: DVN)
This oil and gas driller always seems to raise investor concerns. In 2008, investors shunned its shares since Devon lacked exposure to the sudden plethora of emerging natural gas fields found in the U.S. Southwest and in Appalachia. In 2009, investors fretted that Devon wasn’t investing enough money to boost output in coming years. Then, when Devon announced a plan for major asset sales later in 2009, investors feared that management would simply use that cash to make unproductive acquisitions.

Yet as we sit here in late 2010, Devon is looking far wiser than investors assumed. The company’s lack of exposure to those promising natural gas fields now looks savvy, considering natural gas prices are so low. The company’s asset sales came in at prices higher than most expected, yielding $8 billion in cash for the company. And instead of using that cash to make new deals, management is boosting internal investments in existing properties — especially those that have a higher exposure to oil than gas.

Most importantly, Devon is focusing on boosting shares, paying off $1.7 billion in debt and buying back $1 billion in stock (with plans to buy $2.5 billion more in 2011). UBS thinks Devon will buy back lots more stock in 2012 and 2013 as well, as its balance sheet is now one of the strongest in the industry.

All these moves should ultimately boost per share profits. “With the completion of the asset sale program, Devon has repositioned its operations to have a lower risk profile and a lower cost structure, as well as materially strengthening its balance sheet. This should boost Devon’s long-term production growth,” note analysts at UBS. And rising production growth, which management recently outlined for 2011, could be a key catalyst for shares. Rising production should help boost cash flow from $6.8 billion in 2011 to $8.5 billion in 2012, according to Goldman Sachs. Throw in a lower share count, and that growth should be more evident on a per share basis. And with oil prices on the rise, cash flow projections could move yet higher. [“Why 2011 Could be the Year of the Oil Comeback”]

Meanwhile, shares trade for less than five times projected 2011 cash flow. That’s too low a multiple, according to company CEO John Richels, who recently increased his ownership stake by 53,000 shares.

PharmAthene (AMEX: PIP)
When this small biotech recently decided to raise $15 million, insiders and other large shareholders didn’t hesitate to pull out their checkbooks. (That qualifies as an insider buy according to those that watch insider moves). Their bullishness is understandable. For starters, the company looks increasingly likely to prevail in a lawsuit against SIGA Technologies (Nasdaq: SIGA) regarding marketing rights to a drug that treats smallpox — yielding a potential massive windfall. (SIGA recently received a $2.8 billion order from Uncle Sam, and PharmAthene may be legally due some of that money due to a 2006 agreement that is being contested).

Secondly, PharmAthene is also vying to become a key provider of a next generation anti-anthrax drug to the U.S. military. The U.S. government has been helping to fund development of this drug, which would likely sell for a third of the price of an existing drug sold by Emerging BioSciences (AMEX: EBS).

A positive resolution to either of these drugs would likely be worth at least $6 to $7 to shareholders. If PharmAthene scores on both counts, then shares could zoom to $15 from a current $3. To be sure, the current weak share price implies investor cynicism on these developments. But shares certainly look to be a worth a modest position in light of the considerable potential upside.

QLT (Nasdaq: QLTI)
Major investors in this small firm focused on eye disorders continue to increase their positions. Nearly two million shares have been acquired by two outside investors and three insiders in the past six months, capped off by a recent $1 million purchase by Axial Capital Management. Those purchases were purchased in the $5 to $6 range.

C.K. Cooper’s Jeff Cohen thinks that may be a wise move. He thinks the stock is worth $12 on a sum-of-the-parts basis, noting the company’s nearly $200 million in cash accounts for nearly two-thirds of the company’s market value. Throw in royalties due to QLT, along with an estimated value of drugs and medical devices in its pipeline, and Cohen thinks the stock is a double. Those insiders presumably share that view.

Action to Take –> Of these plays, Devon Energy is the “safe” play, with potential +20% to +40% upside in the next year or two. QLT could be a potential double and even comes with impressive downside support, thanks to that hefty cash balance. PharmAthene looks quite risky, but could really take off if it benefits from its small pox or anthrax drugs.

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