A Board Member Bet $1.1 Million on This Stock
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According to a Form 4 filed with the SEC, Jay Skyler of DexCom (NASDAQ: DXCM) directly purchased 70,000 shares of stock on March 11 at an average price of $15.50 per share. Between his direct holdings and his trust, he now owns over 250,000 shares of the stock (his family owns another 20,000 shares), so this was a significant percentage increase in his holdings. Studies show that stocks bought by insiders tend to outperform the market (read our analysis of studies on insider trading). We think that this is because an insider has strong incentives to diversify their wealth and so will avoid buying more shares unless they are particularly confident in the company. Our database of insider trading filings shows that Skyler last bought shares in November 2011 when the stock was trading just above $7 per share.
DexCom currently trades at about $16.50 after rising in price following the insider purchase. The company is a $1.1 billion market cap designer of glucose monitoring systems, which are used by diabetics and by health care professionals. Revenue growth has been very high at the company: DexCom reported a 41% increase in product sales last year compared to 2011, and this followed a 63% growth rate on the top line in 2011 versus 2010. However, expenses have also risen strongly and--since they started off high in 201--DexCom has turned in operating losses each of the last three years, with 2012’s loss being higher than in the previous two years. Even if we add back R&D expenses, operating profits are negative.
Cash flow from operations has also been negative; DexCom primarily financed its operations last year through sales of marketable securities. Currently cash, cash equivalents, and marketable securities total $49 million, which would be enough to cover another year of burning through cash at the same rate as 2012, though not by much. The company is not expected to be profitable this year or in 2014.
We track 13F filings from hedge funds and other notable investors in our database, and particularly pay attention to what they think of small cap stocks, as these less-followed companies can be good sources of alpha (the most popular small cap stocks among hedge funds earn an excess return of 18 percentage points per year). DexCom is not very popular here. The largest position in our database belonged to Sectoral Asset Management, which cut its stake by 36% during the fourth quarter of 2012 and owned 1.6 million shares at the end of December. Scott Burney’s Bluefin Investment Management was the only other filer we track to report a position worth over $8 million, and it too had been selling shares (find Bluefin's favorite stocks).
Other medical instruments companies include Medtronic (NYSE: MDT), Hill-Rom Holdings (NYSE: HRC), West Pharmaceutical Services (NYSE: WST), and Haemonetics (NYSE: HAE). All of these peers are profitable on a trailing basis, though there is a wide range of earnings multiples: Medtronic, the largest of the four by market capitalization, actually has the lowest trailing P/E at 14, while West and Haemonetics trade at more than 25 times their trailing earnings. Haemonetics has recorded high revenue growth rates, though its earnings have been down, and the same is the case for Hill-Rom. Medtronic experienced modest growth rates on both top and bottom lines in its most recent quarter compared to the same period in the previous fiscal year, and may be the best value prospect of the lot.
We generally don’t like unprofitable companies such as DexCom, and while it is good to see high revenue growth it’s almost worse that the business has not been able to capitalize on more business by reducing its net losses. The cash situation is also a concern. While the insider purchase is enough for us to recommend against looking into a short position, the stock seems like a speculative enough buy that we would avoid it.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Medtronic. 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!