Top Stocks With Significant Insider Buying

Alex is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Insider trading has long been considered by many to be an important indicator of a company's expected performance. After all, if a company officer is willing to put his money on the line, he must be expecting to profit from the trade, the theory goes. It is also claimed that buying activity is usually more relevant than selling (there are many reasons as to why a CEO, for example, might want to sell some of his stock, but nearly the only reason for him to buy shares of the company is because he expects it to make money). There have been some instances, however, that tracking insider trades and acting on them (by buying when the officer is buying, or viceversa) has backfired, which is why it is always essential to do due diligence and not base a buy or sell decision on insider activity alone.

The following three stocks have had recent, significant insider buying: Satellite-radio provider Sirius XM Radio (NASDAQ: SIRI), real estate investment and financial company Newcastle Investment (NYSE: NCT), and hospital operator Health Management Associates (NYSE: HMA).

  1. Sirius XM Radio (SIRI): Insider buying happened on Jan 15, when both director James Mooney, and 10% owner Liberty Media Corp added shares of the company to their portfolio. Mr. Mooney merely exercised his 0.34 options, but Liberty Media Corp bought 50 million shares at $3.16 (the same price as of Friday Jan 18's closing), for a total of $157,780,000. This is a significant purchase. But how attractive is Sirius?
  • With regards to valuation, it is currently trading at a P/E of 6.56x, which is attractive. However, earnings expectations are not as rosy, and Sirius trades at a forward P/E of 31.60.
  • It is priced slightly below its target price of $3.27 (a 3.48% upside as of Friday's close).
  • While margins are attractive (they reported a latest profit margin of 102.87%), their future performance is less clear.

My take: The recent insider buying might signal a positive earnings surprise come Feb. 2, but the relatively low potential upside, coupled with the lack of dividend and uncertain future, make me think twice before following the insiders and pulling the trigger on this one.

2. Newcastle Investment Corp (NCT): On Jan 11, both Director Wesley Edens and Secretary Randal Nardone bought 106,950 shares. Each. That's a purchase of almost $1 million worth of shares, or a total of almost $2 million combined. Would it be wise to follow these gentlmen's footsteps?

  • With regards to valuation, Newcastle trades at a mere 3.69x earnings, and has a forward P/E of 8.26. These valuation ratios are low even for a financial company.
  • It ended last week at $10/share, which is above the average price target of $9.71. However, the most recent price targets are all in the $10-11 range, and analysts' mean recommendation is at an attractive buy level (1.70).
  • NCT is a REIT, and it pays a very attractive dividend of $0.22/share (that's a yield of 8.8%); and they have consistently paid attractive dividends to their shareholders (except during the tumultuous 2009 and 2010).
  • They're in a recovering business: They invest in real estate, mortgages, and other real estate-related assets. Recent housing data in the US has been positive, and it looks as though 2013 will be a good year for real estate in America.

My take: Significant insider buying, attractive valuation, recovering business, and an appealing dividend make me bullish on NCT.

3. Health Management Associates (HMA): Glenview Capital Management (which owns roughly 10% of HMA) bought shares of the company during three straight days (Jan 8, Jan 9, Jan 10), for a total of almost 2.7 million shares (and a dollar value of more than $24.5 million). Let's take a look at HMA:

  • Valuation: Current P/E is 16.42, but the forward P/E is an attractive 10.94.
  • Average price target is $9.36, which is below Friday's closing of $9.85.
  • They currently pay no dividend to shareholders
  • They're in a business with attractive growth prospects

My take: Glenview's aggressive stock purchasing might be a signal for attractive earnings on Feb 13. I like the stock's valuation, and I think that Health Management and healthcare stocks in general will perform well this year. It might be prudent to wait until earnings come out before buying, as the lack of a dividend might make this a less attractive stock to buy and hold than Newcastle if things do not go as expected.

Mr. Bastardas is long on NCT. The Motley Fool has no position in any of the 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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