Can Following The Insiders Into These Stocks Lead To Big Rewards?

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

One strategy that has proven to be effective over time in determining whether a stock is moving higher is insider accumulation, due to one simple reason. Insiders sell shares for a variety of reason, but they buy them, just like us, because they believe the stock will move higher. Furthermore, they have an enviable vantage point of their company's day-to-day operations, and they may also have a large investment of their own, which they would like to see increase in value. The following stocks have notable insider purchases, which may provide you with a nice stating point for your own investment research.

A cloudy contender
Virtualization and infrastructure solutions giant VMware (NYSE: VMW) has seen better days; it recently got slammed on a disappointing earnings report. The outlook was not pretty, and the stock now sits virtually at its $76.25 52-week low.

Nonetheless, major shareholder and storage giant EMC (NYSE: EMC) seems to think the stock will move higher in the foreseeable future. From Jan. 31 to Feb. 2, EMC collectively gobbled up 289,500 shares at an average price of $77.70. That equates to an impressive $22.5 million worth of stock, and brings its total ownership to over 41.5 million shares now, or approximately 10% of the total VMware shares outstanding.

This is obviously a strong vote of confidence. EMC apparently thinks that VMware's stock will move higher, and that the big hit in the share price does make the company more attractive. However, VMware is still trading at some lofty valuations for this Fool, with a trailing price-to-earnings ratio of 45, a price-to-sales of more than 7, and an enterprise value-to-EBITDA ratio of 24.

So while I still believe the cloud computing space has much more growth ahead of it as more of the public realizes its potential, I just cannot get behind a company that is still a little too expensive for my taste at this time.

If I were looking to place a bet on VMW, I think going indirectly through its major shareholder, EMC, makes more sense to me. EMC's stock there trades at a much more reasonable (albeit not growing as fast as VMW) trailing P/E of 20, just over 2.5 times its price to sales, and 8.5 times its enterprise value to EBITDA.

Moreover, they both have basically the same returns on assets and equity of 6% and 14% respectively, so I think buying EMC is in some ways buying VMW on sale. Moreover, you get EMC's highly profitable and consistently growing data storage business. With the continued growth of internet and other data uses, investors can reasonably expect that growth will continue and the stock will move higher over time.

A biotech bonanza?
NewLink Genetics (NASDAQ: NLNK) is a biopharmaceutical company focused mainly on cancer treatment options and solutions. The company has been range-bound the last year, and it's currently stuck in the middle of its 52-week range.

Nonetheless, major shareholder Stine Seed Farm sees rosier days ahead, buying a massive 880,000 shares on Feb. 4 at $11.40 apiece, equating to just over $10 million worth of stock. That brings Stine Seed's total ownership to more than 7 million shares, or approximately 35% of the total shares outstanding. This is a very strong vote of confidence, because Stine Seed's latest purchase equates to approximately 4% of the total value of the company.

Looking more closely at NewLink, we can see some positive developments. The company has either met or exceeded consensus analyst estimates in each of the last three quarters. It's also cleaned up its balance sheet, now holding virtually no debt and approximately $27 million in net cash.

As is the case with most speculative biotechnology companies, NewLink's returns on equity and assets are atrocious. The company usually has no earnings to speak of until its hopefully get approval for the next blockbuster drug. Of course, whether it actually will is anybody's guess. If it does strike gold, investors will be handsomely rewarded -- but if the trials do not go as well as expected, buyer beware.

As a more conservative investor, I would look more towards a well-established biotech firm like Amgen (NASDAQ: AMGN). The company has a consistent revenue stream, now exceeding $17 billion annually; great returns on equity of 23%; and it's trading at virtually its expected growth rate. At a current paltry 26% payout ratio, investors can expect its consistently growing 2.2% dividend yield to continue being hiked in the near future.

Moreover, as big pharmaceutical companies such as Pfizer and Merck continue to look for any way to replenish their depleting pipeline, well-received Amgen drugs such as Neulasta and Neupogen are thriving. They could make Amgen a possible buyout candidate, since Pfizer and Merck could support such a large acquisition. Of course, I never base my investment decision on an expected buyout -- but it could still become a nice surprise.

Follow the inside scoop
Overall, I think that with such large insider buying that we see here, any shrewd investor should take notice and put these stocks on their radar.


Wiseinvestors has no position in any stocks mentioned. The Motley Fool recommends VMware. The Motley Fool owns shares of EMC and VMware. 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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