Two Tech Stocks Favored by Insiders
Jag is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Stock price movements are guided not only by broad economic trends and company policies, but various other factors like institutional interest. Ceteris paribus, increased institutional buying of a stock is an indicator of good things to come. Similarly, insider buying is also considered a positive indicator for a stock. Like any other indicator, I do not use these in isolation. However, in conjunction with the analysis of other factors, these indicators can provide invaluable help in picking up the right stocks.
AT&T grows through acquisitions
AT&T (NYSE: T) shares have been rather subdued this year. However, according to its SEC filing, the company’s board member Michael McCallister boosted his stock holding by purchasing 9,000 of the company shares. The purchase was made through a trust connected to the board member.
AT&T recently announced strong quarterly results, where its revenue increased by 1.6% on a year-over-year basis to $32.1 billion. It also grew its EPS by 2% to $0.67 per share. However, it missed consensus estimates by a penny. AT&T saw further competition for its hold on the iPhone as T-Mobile started selling the popular phone. While the move is not likely to have significant impact on the iPhone subscriber base of AT&T, the company is now required to be extra cautious on the pricing front.
The telecom company is not sitting still. It is looking to grow its technological edge, not only organically, but also through acquisitions. Moving beyond its T-Mobile debacle, the company recently announced the acquisition of Leap Wireless (NASDAQ: LEAP). Not only will the acquisition help AT&T in boosting its spectrum, but it will also bring an additional revenue stream. As the telecom sector goes through a consolidation phase to fend itself against declining revenue, Leap's acquisition will help AT&T to maintain its leadership position in the segment.
AT&T will pay $1.2 billion for the acquisition and will also assume Leap’s debt worth $2.8 billion. Despite the ostensibly high price tag, AT&T stands to benefit from the acquisition, as Leap has wide tranches of unused spectrum. It is also likely that post-acquisition, AT&T may choose to slowly liquidate Leap’s flagship brand, Cricket, to free up the spectrum. The move makes sense as Leap has relatively low ARPU, in comparison to other stalwarts like Verizon and Sprint. Cricket currently has a little over 4.5 million subscribers, and with the high churn rate, the base is not so attractive for AT&T. However, Cricket may help AT&T in tapping the prepaid market, which is relatively less saturated than the postpaid segment.
Overall, AT&T is doing a good job in an otherwise stagnant telecom market. In the near-term, the company’s latest acquisition is likely to be the major catalyst for the stock.
eBay earnings miss an investment opportunity?
Just like AT&T, eBay (NASDAQ: EBAY) also attracted good insider interest as its board member Kathleen Mitic snapped up 5,000 shares at the average price of $51.61 per share. Following its dismal performance in the second quarter, the stock plummeted in late July and now offers an exciting entry point for lucrative medium-term investment.
Notwithstanding its recent earnings report, eBay has done well for itself. Its revenue increased 14% on a year-over-year basis. The company also has a strong cash position as its free cash flow for the second quarter stood above 16% of revenue.
eBay’s holistic business set-up gives it an edge over its rival Amazon (NASDAQ: AMZN). With Paypal registering healthy growth in the mobile payment segment, eBay now has an opportunity to integrate its phone and tablet apps. This is likely to help bridge the gap between eBay and Amazon. The rival company reported 22.4% growth in its revenue for the second quarter of the year.
However, Amazon failed to meet consensus revenue estimates pegged at $15.73 billion. It also suffered a quarterly loss, alluding to the tough economic environment, which is the cause for concern at eBay as well. Its stock, though, remained resilient as it showed only a minor pullback despite disappointing results
The company also offered very conservative guidance for the third quarter, as it expects its loss to be in the range of $440 million and $65 million, compared to a loss of $28 million in the third quarter of the previous year. However, it expects to show 12% to 24% growth in its revenue. Even the low guidance did not bring down the stock, which is trading at extremely high valuation.
The market seems to bank on revenue growth for Amazon instead of net income growth. Another factor behind its smooth stock price movement is Amazon’s revenue stream diversification. The company not only deals in online marketplace segment, but also has fingers in other lucrative pies such as the online publishing and e-Reader market. With the introduction of Amazon Fresh, a grocery delivery service, it is expanding itself further.
In comparison, eBay stock is more reasonably priced as the company is now boosting its international operations to neutralize the impact of stagnant domestic demand. It recently infused $50 million worth of capital in SnapDeal.com, which runs an online marketplace in India. The move will help eBay in augmenting its position in the growing market. With PayPal, the company also enjoys a dominant position in the mobile payment segment. Vis-a-vis Amazon, eBay is likely to provide better EPS growth instead of merely fixating on revenue growth.
As explained above, insider interest may be used as a good indicator of a stock’s future growth prospects. AT&T's stock is expected to perform well in the near future as the company contemplates the acquisition of new spectrum through Leap Wireless. eBay, on the other hand, is increasing its hold in the international markets. It is also expected to grow through synergies via PayPal. Both the stocks offer good investment opportunities for a medium-term horizon.
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Jag Mitra has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay. 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!