Every time the market swoons, the level of insider buying picks up sharply. It's the natural reflex company officers and directors have in a bid to defend their stock. Trouble is, these folks don't have the greatest track records. If the market falls further, then their stocks often perform poorly. And if the market rebounds, then their stocks simply rise in tandem with the rest of the pack.
Instead, I like to watch the actions of insiders when markets are moving sideways or are on an upswing. That's when insiders give a much clearer signal that shares hold value.
To be sure, insider buying appears to be at a lull since the market has been surging. The volume of daily and weekly filings has been fairly low in 2012. But the stocks that are seeing fresh insider buying surely deserve a close look right now. The 11 stocks in the table below have been the beneficiary of at least $400,000 of fresh buying since the start of the year.
Although this list almost exclusively involves officers who actually work at the company in question, I've also included Wendy's (NYSE: WEN) in this table, even though some of the biggest buying came from its major shareholders (who must register their moves with the SEC just as company officers do). The reason I bring this up is because I've recently written about the intriguing turnaround potential for this fast-food operator, and it's a bullish sign that the company's key investors are showing a $100 million vote of confidence in new CEO Emil Brolick.
I usually caution that turnarounds can be slow to take shape, because they involve upfront investments in the business that investors tend to dislike. But if Wendy's management can make tangible progress and shares continue to languish at current levels, then it will be interesting to see what shareholder Nelson Peltz will do. His investment firm, Trian Fund, already owned 23% of Wendy's at the end of 2011, and this stake has now bumped up to 27%. It's curious to note that in June 2011, Peltz announced that an unnamed third-party had approached him about taking Wendy's private. Nothing seems to have come out of that overture, perhaps because the two parties disagreed on a buyout price.
Perhaps Peltz was just blowing smoke. But it's clear that shares are sharply undervalued in relation to McDonald's (NYSE: MCD), and would post major gains if the wide spread between the two firms' operating metrics ever narrowed.
Unilife (Nasdaq: UNIS)
This company is at the opposite end of the spectrum from Wendy's. The medical device maker was listed on the Australian stock exchange back in 2002 and was cross-listed on the Nasdaq beginning in February 2010. Shares got off to a rousing start then, doubling in value on their second day of U.S. trading to almost $18, but it's been downhill ever since, with shares now trading below $4.
Unilife sells safety syringes that can be pre-filled by drug manufacturers or to hospitals that order them un-filled. These syringes' needles automatically retract after usage, eliminating the chance of unnecessary spikes for health care professionals. Getting Food and Drug Administration approval for a pre-loaded syringe is a cumbersome process, as each drug/syringe pairing needs to be approved. The company already has a licensing and supply agreement with Sanofi-Aventis (NYSE: SFY), with more expected to follow. Sanofi has spent $40 million to help Unilife refine its technology and is expected to pay Unilife $5 for each syringe.
The share price sell-off comes as investors grew impatient for the Sanofi relationship to start ramping up. Analysts once said Unlife would be in the midst of a major revenue upturn by now, but recent quarterly results have shown minimal revenue. This should normally tell investors to simply move on to other ideas -- yet in this instance, a fresh look for upside is merited.
First, the Sanofi relationship appears stalled but not broken. Sales may only hit $10 million to $15 million in the current fiscal year that ends this June, but analysts expect to see sales finally start to build in fiscal 2013. The current consensus forecast of $69 million in fiscal 2013 sales is likely a stretch. Investors would be cheered if Unilife had just $30 million or $40 million in sales, as this would at least imply a better sales ramp to come.
Second, CEO Alan Shortall has spent nearly $1 million acquiring stock on the open market in the past seven weeks. He has a clear read into discussions that Unilife is holding with current and potential partners and would be foolish to pony up this kind of money if the company's 2012 prospects were dim.
Risks to Consider: Unilife is clearly a high-risk play, but investors seem to have abandoned this still-promising medical device firm. Also, when looking at the entire list above for further investment ideas, remember that insiders may know their own businesses very well, but are not always great stock pickers. So use their moves only as a basis for further research.
As long as the market stays aloft, keep an eye on insider filings. In an environment where bargains are getting harder to come by, stocks bought by insiders may provide one of the few areas for further upside.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.
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