Opko's Massive Insider Buys: Should Investors Follow Suit?

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"There are many reasons for an insider to sell a stock, but only one to buy it: he expects to make money." So goes the saying. Many investors invest their time in tracking insider transactions, as it is assumed that a company insider probably has some unique insights into the company's business, and likely expects those shares to go up in the future. If that's true, then Dr. Phillip Frost, the CEO and chairman of multinational pharmaceutical and diagnostics company Opko Health (NYSE: OPK), deserves a closer look. On a nearly daily basis since last summer, he's been buying massive amounts of OPK shares in the open market.

Since Aug 28, Frost has purchased more than 5.2 million shares of Opko, spending more than $24 million of his own money. The shares he has bought since August are now worth more than $36.5 million, giving him more than $12.1 million in unrealized profit from their subsequent gains. There is no denying that the stock's price surge has been fueled, if not by Frost's purchases, then by the bullish signal they send to investors.

But how does OPK's stock look?

With regards to valuation, the stock has no P/E ratios as EPS were negative, but it does trade at a P/B of 12.33, which could suggest that the stock is overvalued.

The very limited number of analysts that cover the stock are bullish: The stock has an average recommendation of 1.00 (buy), and an average target price of $7.75, which implies a potential price upside of 10.24%.

However, it must be noted that the most recent analyst report dates from October 2012, so take this information with a grain of salt. At any rate, some of its competitors have higher implied price potential when taking into account their average price target prices. This is the case with Alnylam Pharmaceuticals (NASDAQ: ALNY), which has an implied upside potential of over 30%.

Opko Health pays no dividend, and has never done so. This puts the stock in a relatively unattractive position when compared to some of its competitors. Merck & Co. (NYSE: MRK), for example, pays a dividend that currently yields a little over 4%.

The stock price is just 4% off its 52-week high of $7.35.  The 52-week low is $4, but the stock traded at as low as $0.61 in early 2009. The stock reached its historical high of $7.15 on Feb. 26 of this year.

 
<table> <tbody> <tr> <td> </td> <td><strong>P/E</strong></td> <td><strong>EPS (ttm)</strong></td> <td><strong>Avg Rec</strong></td> <td><strong>Avg PT (% implied upside)</strong></td> <td><strong>Div Yield</strong></td> </tr> <tr> <td><strong>OPK</strong></td> <td>N/A</td> <td>-0.04</td> <td>1.00</td> <td>$7.75 (+10.24%)</td> <td>N/A</td> </tr> <tr> <td><strong>MRK</strong></td> <td>19.86</td> <td>2.16</td> <td>2.30</td> <td>$48.43 (+12.71%)</td> <td>4.00%</td> </tr> <tr> <td><strong>ALNY</strong></td> <td>N/A</td> <td>-2.11</td> <td>2.10</td> <td>$30.75 (+30.68%)</td> <td>N/A</td> </tr> <tr> <td><strong>Industry Avg</strong></td> <td>33.33</td> <td>0.07</td> <td>-</td> <td>-</td> <td>-</td> </tr> <tr> <td><em>Edge</em></td> <td><em>MRK</em></td> <td><em>MRK</em></td> <td><em>OPK</em></td> <td><em>ALNY</em></td> <td><em>MRK</em></td> </tr> </tbody> </table>

Opko's ratios are bad, its EPS negative, it pays no dividend, and the stock is not very attractive compared to its competitors. However, investors should bear in mind that it is not unusual for biotechnology companies to have poor earnings ratios or even losses until they launch a breakthrough product.

Consequently, if an investor were to ignore EPS-related ratios or the lack of dividend, the stock would look quite attractive: superb momentum, bullish analysts, and massive insider buying. 

So is this a buy?

There are some indicators, however, that could suggest that the stock has risen too fast (it has gone up 60% in the last 3 months), is unlikely to keep growing at such rates, and might even be overvalued.

Opko Health states that it will not be profitable in the near future. Again, this is not unusual for a biotechnology company, but it is worth keeping in mind, especially for those investors with little patience or small capital who would not like to see their money locked in a stagnated stock for too long.

If the stock price does indeed stagnate, or even goes down, or if Frost stops his insider buying spree, many investors might become impatient and jump ship. This would cause the stock price to drop further, perhaps triggering more sales, and even some serious shorting activity.

Some believe that Frost's continuous buying might be creating a short squeeze. However, Frost, while still buying, has slowed down his purchases, and the amounts tend to be lower. Furthermore, the daily significant buying can't go on forever. If, for whichever reason, he decides to stop, the stock could tumble as its main bullish sign disappears.

Frost now owns more than 121 million shares of Opko Health, for a total value of almost $850 million. Due to economies of scale, the price surge OPK has experienced mainly due to Frost's insider buying has benefited him enormously, since he already held very significant number of shares. The unrealized prize gains arising from this price surge outweigh the cost of his almost daily insider purchases.

This is not to say that Frost's goal is to drive up the stock price and increase his shares' value. But investors should take that into account, and not believe that Frost is just spending his own cash without seeing any profit. The big risk, of course, is that Dr. Frost would sell his shares and pocket the profits from the price surge. I think that is very unlikely, and there is no denying Frost's personal loyalty to Opko and sincere belief in its bright future. But he could do just that, and the main losers would be the investors holding the shares, not Dr. Frost.

Bottom line
Opko Health has had great momentum since August 2011, mainly thanks to Frost's massive insider buying. The stock's fundamentals are not especially attractive, but that is not uncommon for biotechnology stocks. If Opko comes up with a breakthrough product, its shares should climb.

So should investors join the buying frenzy? I think there is no clear answer. On one hand, Frost has unique insights into the company, and his purchase of such a large amount of shares is significant.

On the other hand, investors should be cautious: The stock has risen very significantly in a very short time, so it could experience a correction. Furthermore, the company is not yet profitable, and does not expect to be so in the near term. Eager Opko investors could end up with a dormant stock for some time.


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