Company insiders operate in a very predictable fashion. Defined as officers, directors and outside shareholders who control more than 5% of company stock, these insiders tend to sell company shares when the market is flat or rising and are active buyers only when they see a slumping stock market.
And sure enough, insider buying activity has been extremely low recently, thanks to an S&P 500 that has risen 15% in just four months. Still, I've come across a cluster of companies that are bucking the trend: Their insiders have been active buyers of company stock in the early part of 2013, pointing the way to upside in the periods ahead.
(Author's note: All insider data provided by InsiderInsights.com)
|1. Boulder Brands|
|Boulder Brands (BDBD) changed its name a few months ago from Smart Balance. Was the name changed because a mid-2012 $125 million acquisition of health foods brand Udi's led to a much broader sales mix with many other brands now in house? (The core Smart Balance brand, a cholesterol-lowering butter spread, has accounted for more than half of sales prior to that deal.) |
Or did management change the name because the Smart Balance brand is on the cusp of losing key patents in 2015, and management needs to alter the company's image before sales likely fall in that division?
The reason is unclear, but the change highlights the challenges this company faces as it seeks to grow while a core brand weakens. To their credit, management has been developing an impressive set of ancillary brands in areas such as gluten-free baked goods and vegan-based prepared foods.
You can see the impact of organic and acquired growth on the income statement. Sales had been in the $200 million to $300 million range from 2008 to 2011 but shot up to $370 million in 2012. Analysts think sales will exceed $450 million this year and to $500 million by next year.
Still, Boulder Brands has one major detractor. A columnist on Seeking Alpha has been accusing the company of murky accounting, suggesting that cash flow is weaker than the company portrays and predicting the company will need to raise cash soon. His public concerns likely led the stock to drop roughly 37% from early February to a recent $8.50.
This story would end there, except insiders have stepped into the breach to defend this stock. A group of eight officers and directors plunked down a combined $293,000 on March 6, paying an average price of $8.81 a share. That kind of spirited defense of the stock means you should watch this saga. If the bearish argument proves false and shares rebound back to where they stood in early February, then investors are looking at fairly quick 50% upside. I'll be keeping an eye on this battle.
|2. Swift Energy|
|The pullback in natural gas prices from their 2008 peaks continues to wreak havoc on many gas drillers. Weak gas prices have resulted in negative free cash flows, and many companies are scrambling to reduce capital spending to maintain cash. |
Swift Energy (SFY) is a perfect example, as a $440 negative free cash flow result in 2012 has led management to shave a similar amount from its 2013 capital spending budget.
Shares of Swift Energy have steadily slumped in the face of this cash flow weakness, though recent insider activity points to solid value at these levels.
Despite its woes, Swift offers up solid operating cash flow and balance sheet metrics, and the planned reduction in 2013 capital spending should help prop up free cash flow as well. On a core basis, Swift generated roughly $300 million in operating cash flow in 2012, which compares favorably to its $1.5 billion in enterprise value. (That is to say, shares trade for less than five times cash flow.)
And this stock's $650 million market value is handily below tangible book value of $1.04 billion. Those metrics should help shares find support at current levels. And improving free cash flow, along with an eventual rebound in natural gas prices, could make that insider buying quite prescient.
|3. Home Loan Servicing Solutions|
|Roughly a month ago, I noted that legendary fund manager Leon Cooperman was buying shares of Home Loan Servicing Solutions (HLSS), a mortgage processing services provider. Though shares had already moved up from $13.50 this past summer, Cooperman was buying this stock even as it approached $20. |
Insiders are getting in on the action as well. Though they steadily bought shares throughout 2012 as the stock price drifted up toward $20, they're still at it: In mid-February, three insiders bought a combined $180,000 in stock at an average price of $22.50. Despite this stock's impressive run, investors can still lock in a juicy 6.7% dividend yield at current prices.
Risks to Consider: Insider signals can help you uncover hidden opportunities, but these officers and directors are notoriously bad market timers, so you shouldn't view their purchases at these levels to represent a bottom floor price.
Action to Take --> Akamai Technologies (AKAM), TriQuint Semiconductor (TQNT) and Vocus (VOCS) are also stocks to watch with recent insider buying. Use these insider signals as a starting point for your research. Pair them up with other metrics such as valuation characteristics and growth opportunities. If a company can check many boxes -- including insider buying -- then you may have a solid potential gainer on your hands.
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