Insider Trading Stocks You Cannot Ignore in 2012
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Identifying a stock that has been subject to a meaningful level of insider buying should not always an instant cue to invest, but it does raise a flag that the company might deserve a closer investigation.
Several academic studies have been conducted on the relationship between insider buying and future investment returns. One particularly popular publication, Investment Intelligence from Insider Trading (Seyhun, 2000), presents evidence that, on average, stocks that have undergone insider purchasing tend to outperform the total market by almost 9% over the next 12 month period. The same study concluded that the converse also holds true – when insiders sell company shares, on average the stock will underperform the market by 5.4% over the next twelve months.
The easily understood and widely appreciated hypothesis is that management inside the firm, who is most intimate with the corporation’s operations, are more privy to information regarding the general direction of sales, earnings, and cash flow figures than is the general investing public.
As we enter the 2012 trading season, there are currently several seemingly inexpensive picks with meaningful levels of recent insider buying activity. How will these stocks fare compared to the market over the next twelve months?
Owens-Illinois (NYSE: OI)
Albert Stroucken, CEO of this century (plus) old glassmaker, has recently made a personal investment of slightly more than $2 million at an average per share price of around $16.56.
Even after a 37% drop in per share price in 2011, there is still some concern over the firm’s large debt balance, its pension and asbestos obligations, and its future in this seemingly declining industry. As a result, the stock now screens relatively inexpensively compared to the corporation’s recent performance.
What prospective investors cannot discount is the corporation’s meaningful command of the worldwide glass bottle manufacturing industry. The long term viability of the glass bottle industry has been questioned, as more advanced materials (i.e. plastics) have gained in popularity over the past several years. However, as further explained in a recent article, the glass packaging medium is more prevalent than ever, especially in developing markets like Brazil and China.
OI initiated a restructuring initiative during the peak of the recent economic downturn (which made the stock appear less attractive to the general public), and with more streamlined operations the corporation is now in an excellent position to capitalize on the industry’s post-recession upswing.
GeoEye, Inc. (NASDAQ: GEOY)
Even without recent insider trading activity, at a recent price of $23.13 GEOY appears to be an inexpensive find. The stock now trades at an EBITDA multiple of 4.8 and a P/B ratio of 1.08, which implies a significant 40% peer discount compared to the corporation’s major competitor for high resolution satellite imagery, DigitalGlobe Inc. (DGI). The competitor’s current EBITDA (trailing twelve months) and P/B ratios are 6.74 and 1.53, respectively.
What has been more interesting to prospective and current GEOY investors than the small level of insider buying is the huge $19+ million stake Cerberus Capital Management founder Stephen Feinberg has established over the past several months. Feinberg no doubt sees a bright future for the satellite imagery corporation, and it is no mystery as to why he purchased an additional 625,400 shares in December (average price $21.76). The corporation is trading as inexpensively as it has over the past five years, with an enterprise multiple that is four times less than the period’s average.
GEOY provides high-accuracy, high-resolution Earth imagery, and provides these services to governments and other commercial customers worldwide. In recent news, the company announced a significant multi-year, multi-million dollar contract to provide high-resolution satellite imagery of Russian land properties to a Moscow-based firm ScanEx.
Other Possible Opportunities
OPKO Health (NYSE: OPK) Chairman and CEO Phillip Frost has actively purchased the stock over the past few years, following the stock as it appreciated from around $1.60 to today’s price of $4.94. In December 2011 alone, Frost acquired an additional 220,000 shares at an average price of $4.85. Providing an array of pharmaceutical solutions including molecular diagnostic tests and vaccines, the company has generated significant operating losses over the past several years (although the rate of loss has decreased by 6% per quarter over the past 12 quarters). Does Frost’s recent buying imply the turnaround will continue over 2012?
ATP Oil and Gas (NASDAQOTH: ATPAQ.PK) insiders have purchased 165,000 shares at an average price of $6.37 since November 2011. The corporation, which is engaged in the acquisition, development, and production of natural gas and oil properties, is engaged in a handful potentially lucrative operations in the Mediterranean Sea, the Gulf of Mexico, and the North Sea. Although the company appears to harbor a ton of risk in the way of its near $2 billion debt load (compared to its $11.9 million in operating income generated over the past twelve months), management argues that the company is in a suitable position because it is not burdened with the high risks and costs associated with exploration activities. 2012 should be a particularly interesting period for the stock due to the competing hypotheses of the company’s management team and the stock’s large short interest – 50% of the float as of December 15, 2011. Investing is no doubt a zero sum game, so which party will benefit from the substantial loss of the other?
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