Investors who try to uncover value among companies with a lot of insider buying have their work cut out for them.
First, they need to confirm that the buying activity is done with real money and not merely stock option conversions. Some folks will tell you that getting company stock for free and then hanging onto it is a vote of confidence, but it's not.
You also need to separate the buying activity by officers and directors, rather than major investors, which can be classified as insiders if their stakes in the company are large enough. I sometimes track the moves of such major investors, but at the end of the day, they aren't truly insiders.
Lastly, you need to confirm that share prices still hover in the same area as when the buying took place. Shares often rise quickly on news of insider buying, and if that happens, it's often too late to capitalize on the bullish insider activity.
I've spent the past few days reviewing a broad range of insider buying activity that has taken place over the past month, and tossed out most candidates for further research, for the reasons noted above. But these six companies caught my eye.[More from StreetAuthority.com: 6 Stocks With Major Insider Buying]
Each has a powerful reason -- in addition to insider buying -- that should serve to lure investors. (All data provided by InsiderInsights.com.)
|1. MVC Corp. (NYSE: MVC)
This is a business development company (BDC), which acts as both an investor and lender to privately held growth-oriented companies.
MVC has seen a steady stream of insider buying for more than a year, primarily from three different directors. In that time, there has been only one minor bit of insider selling. On June 27, director Robert Knapp made the biggest purchase yet: a 145,000-share block worth more than $1.8 million.
The other reason to take note of MVC: Shares trade below $13, but MVC carries a tangible book value of $16.42 a share. That means you can buy this BDC's portfolio of investments and loans at a 20% discount to face value.
|2. American Realty Capital (Nasdaq: ARCP)
If there's a knock against MVC, it's that its dividend yield is a tepid 4%, well below other BDCs. If you like to pair insider buying with a better yield, check out this real estate investment trust (REIT), which sports a 7.9% yield.
American Realty has come in for a fair bit of criticism, due to a breakneck pace of asset purchases and sales that have made it hard to analyze cash flows.
But the pace of such activity appears set to slow sharply, which should allow investors to catch up in their analysis. If they conclude that underlying cash flows are stable as the portfolio is currently constructed, then they'll flock to this REIT, as that dividend yield is unusually high. Meanwhile, as a show of support, nine different insiders have been buying shares since late March, worth a collective $2.3 million, mostly above the current $12.45 share price.
Looking beyond these financial firms, there has been a cluster of insider buying in the biotech sector, including:
|3. Heron Therapeutics (Nasdaq: HRTX)
When this drug developer announced an $11.25 a share secondary offering in late June, a pair of directors bought more than $6 million the deal. Outside investors were pretty annoyed at the seemingly rushed offering, and they've pushed shares roughly $1 below that deal price. It's always appealing to get shares for prices less than what insiders pay.
Heron is conducting Phase III trials for a drug that combats nausea after chemotherapy. It's a large population size, and current treatments are less than ideal. The company plans to submit a new drug application filing late this year, and if that application is successful, Heron's SUSTOL could be on the market in the first half of 2015.
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|4. Seattle Genetics (Nasdaq: SGEN)
Speaking of underwater insider buying, director Felix Baker bought nearly $40 million in stock of Seattle Genetics over the course of the past 30 days, with an average purchase price in the upper $30s.
Shares are now around $36, below his cost basis. Baker's bullishness may still be vindicated: UBS just upgraded this stock to a "buy" (with a $48 price target), noting that the company has a solid drug development pipeline and drug trial catalysts in the second half of this year.
Seattle Genetics is developing antibodies and antibody drug conjugates (ADCs), which target certain types of cancers. The company already has a product on the market, Adcetris, which was approved in 2011. Seattle Genetics generates around $300 million in annual revenue, thanks to licensing partnerships, but is not yet profitable.
Still, this company isn't being measured by financial metrics just yet, and is instead a play on continued drug efficacy in clinical trials. Felix Baker (and his $40 million open-market purchases) presumably figures that such drug trials will justify his optimism.
Biotech investors may also want to research Novavax (Nasdaq: NVAX), which I profiled this spring, and Merrimack Pharma (Nasdaq: MACK). Each firm has near-term drug trial catalysts and each firm has seen recent insider buying at prices above the current share price.
Risks to Consider: The risks for these companies really focus on the biotechs. Any negative clinical trial data in the months to come could hammer these stocks.
Action to Take --> All these insider buys are based on large sums of money, not just token efforts to show support for a stock. As we head into earnings season, you'll have a chance to hear about revised outlooks from each of these firms, to see why insiders are so bullish.
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