Why are Insiders Buying Opko Health?
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the financial world, there are many reasons corporate insiders would choose to sell their company’s stock, but only one reason they would choose to buy. Over the past decade, there has been a flood of empirical research – Lakonishok in 2001, Jeng in 2003, and Metrick in 2003 – focused on determining the profitability of insider trading.
Interestingly, each study discovered a statistically significant correlation between insider purchases and abnormal returns, effectively throwing a wrench in the strong-form efficient market hypothesis. When the dust settled, it was found that investors who mimic insider buying behavior can beat the market by 6.4 percent per year, risk-adjusted. Any strategy that can consistently outperform the market should be welcomed with open arms. So here’s a note to all insider-watchers out there: Opko Health (NYSE: OPK) has seen a rash of purchases lately, which are detailed below for your viewing pleasure.
Dr. Phillip Frost: With a name that sounds like he suits up as Mr. Freeze in the twilight hours of Gotham City, Dr. Frost has been quite the bull lately. As the CEO and chairman of the drug and medical device company, Frost is theoretically the best insider to follow, not to mention that his current net worth ($2.3 billion) exceeds Opko’s entire market value ($1.4 billion). Since May, he has bought 2.23 million shares of OPK for a total value north of $10 million, increasing his total ownership of Opko to 37.3 percent.
Over this same time, the stock’s value has remained relatively flat, though the company has announced a key U.S. patent allowance of its “Flow Control in Microfluidic Systems” application. While this sounds like medical gobbledygook, it essentially gives the company a way to have a larger foothold in the point-of-care diagnostics market. Anytime you have your cholesterol checked or glucose levels monitored, a POC device is most likely used (here’s a good way to visualize this technology). Now, it’s estimated that the total size of the POC market will be worth $16.5 billion by 2016, up from $13.8 billion today. So, it may be the combination of this macroeconomic tailwind with Opko’s newfound patent advantage that explains Frost’s bullishness.
Dr. Richard Lerner: Aside from the CEO, company director Richard Lerner has also bought shares of OPK over the past couple months, adding 50,000 shares at an average price of $4.60 each. While this amount is much smaller than those of his superior, it does represent a larger portion of Lerner’s portfolio, as these transactions nearly doubled his total holdings of the stock. Interestingly, Lerner has served as the president of the Scripps Research Institute, a nonprofit biomedical research institute with links to POC explorations. If something big were on Opko’s horizon, Lerner would clearly have the expertise to understand the potential benefits of such a possibility.
From an investment standpoint, Opko has been a dud in 2012, losing 5.9 percent of its value. The company has reported negative earnings in each of the past five years, though they are nearing profitability. After having an EPS of -$0.13 in 2009, and -$0.08 in 2010, OPK almost broke even last year, reporting an earnings loss of 1 cent a share. By the end of this year, the Street is still expecting a loss of 10 cents a share, so much is riding on the company’s next earnings release the second week of August.
Bulls will point to Opko’s $8.8 million in revenues in the first quarter of 2012, which was up 51.5 percent year-over-year, but this underwhelmed analyst expectations, who were forecasting a top line of $9.1 million. Negative earnings makes traditional P/E analysis unusable, but it is notable that the stock is currently trading at a price-to-book ratio (8.8X) that is way above the industry average (2.3X), and competitors like Medtronic (NYSE: MDT) at 2.3X, Stryker Corp (NYSE: SYK) at 2.5X, and Waters Corp (NYSE: WAT) at 5.2X.
It is also trading at a price-to-sales ratio (44.8X) that is exorbitantly larger than MDT (2.5X), SYK (2.4X), and WAT (3.7X), though OPK does sport a 3-year average revenue growth (43.6%) that is oodles higher than MDT (3.5%), SYK (7.3%), and WAT (5.5%). Interestingly, the major thing setting Opko apart from its competitors has been its disastrous margins, as its operating (-93.6%) and net (-21.8%) margins look like something out of a horror movie. Compared to MDT (28.8%, 22.4%), SYK (20.6%, 16.4%), and WAT (28.4%, 23.2%), they look even worse.
If Opko does deserve its high valuation, its POC patent may provide the dollars, but it is going to have to control the expenditures that come with this newfound advantage. WealthLift’s Sentiment Index rates OPK as a hold, as users are mixed on what the future may hold for this drug and medical device company. To read up on other trading ideas in this uncertain market environment, visit WealthLift Insider today.
Fool blogger Jake Mann doesn't own any shares in the companies mentioned in this article. The Motley Fool owns shares of Medtronic. Motley Fool newsletter services recommend Stryker. 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. If you have questions about this post or the Fool’s blog network, click here for information.