CEOs Are Buying These Stocks (Part I)

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Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”

Peter Lynch 

According to Peter Lynch, investors should follow insiders’ buys closely in order to pick the right investment opportunities. In February, there were four CEOs who bought shares of their own companies, including First Commonwealth Financial Group (NYSE: FCF), Computer Programs and Systems (NASDAQ: CPSI), Bally Technologies and Electronic Arts. In this article, we will look closer at the first two companies to determine whether or not investors should follow these CEOs into their companies.

A Pennsylvanian Bank

First Commonwealth is a provider of consumer and commercial banking services, and trust and wealth management services, with more than 110 community banking offices in Pennsylvania. As of December 2012, the majority of First Commonwealth’s deposits, $2.54 billion, or 55.8% of total deposits, was savings deposits. Time deposits ranked second, with more than $1 billion. The third biggest deposits source was noninterest-bearing demand deposits, at $883 million. The largest loan category was Residential Real Estate, $1.24 billion, or 29.5% of the total loan portfolio. Commercial & Industrial ranked second with $1 billion in loans. In 2012, First Commonwealth generated 3.61% in net interest margin. On Feb. 6, Michael Price, the President and CEO, bought 2,600 shares at around $7.08 per share, with the total transaction value of only $18,408.  At the current trading price of $7.25 per share, the total market cap is $724.3 million. The market is valuing First Commonwealth at 12.3x forward earnings and 1x book value. Currently, the bank is paying a 2.8% dividend yield to shareholders.

Consistently High Return but Not so Cheap

Computer Programs and Systems is a healthcare information technology company for small and mid-size hospitals. The majority of its sales, $73 million, or 40%, was generated from support and maintenance segment. The second biggest revenue contributor was system sales, generating $72.5 million in sales in 2012. For the last 10 years, Computer Programs has been consistently generating a high return on invested capital that has been in the range of 26.36% - 69.70%. Over the past 12 months, the net margin was 15.42%, while the return on invested capital was 46.3%. The high returns have been generated without the help of any leverage.  As of December 2012, Computer Programs had $57.2 million in total stockholders’ equity, $8.9 million in cash, and no debt. At the current trading price of $49.10 per share, Computer Programs is worth $544.15 million on the market. It was valued at 11.76x EV/EBITDA and 8.5x book value. Computer Programs is also a consistent dividend paying company, with a dividend yield of 3.9%. In February, several insiders including the Chairman, the CFO, the CEO, and Senior VP bought 11,800 shares, with the total transaction value of more than $560,000.

One of its peers, WebMD Health Corporation (NASDAQ: WBMD), has a much higher valuation. At the current price of $16.60 per share, WebMD is worth nearly $830 million on the market. It is valued at 16.53x EV/EBITDA and 1.61x book value. However, WebMD generated much less profitability than Computer Programs. While the operating margin of WebMD was 4.93%, Computer Programs had a 23% operating margin. In addition, WebMD used much more leverage than Computer Programs. As of September 2012, WebMD had $510 million in total stockholders’ equity, $970 million in cash, and $800 million in long-term debt. Its debt/equity ratio was 1.6x, while Computer Programs had no debt at all.

Foolish Bottom Line

With the decent dividend yield and consistently high returns on invested capital, Computer Programs is a good stock to own for the long term. First Commonwealth seems to be a good play on the improving residential real estate market. However, both Computer Programs and First Commonwealth had a bit rich valuations. I would rather wait for some price corrections before coming in.  

 

 


hoangquocanh has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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