Company Focus
4 picks from all-star insiders
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Some insiders know when to buy and sell better than others. Here are four stocks knowledgeable insiders are buying now -- and three where insiders’ sales may be signals of trouble ahead.
By Michael Brush
With their front-row seats on the action, corporate insiders have a proven edge over the rest of us in knowing when to buy and sell the shares of their own companies.
That’s why portfolios created by mimicking the moves of insiders often trounce other strategies. The Insider Portfolio, a model portfolio created by Vickers Insider Weekly, has rocketed 1,353% since its inception in October 1986 through Sept. 23, 2003. By contrast, the Dow Jones Industrial Average ($INDU) is up just 426% in the same period.
As good as most insiders are, an elite corps stands out for its slugging prowess. Think of these high-powered insiders as the stock market’s answer to the St. Louis Cardinals' Albert Pujols and the San Francisco Giants' Barry Bonds, outfielders whose batting averages have topped the charts this season. In the same way their fans like to see Pujols or Bonds come up to bat in a tight spot during a pennant race, these all-star insiders excel at stock picking during this normally rocky fall stretch.Money 2004.
Smarter, faster and easier
than ever.
The best of the best
In our effort to scout for the best of today's corporate insiders -- focusing especially on players who have made bets on their own shares recently -- we turned to the keepers of a rich database of insider batting statistics, the experts at Thomson Financial.
Who makes the short list?
We dug up sluggers like venture capitalist Lindsay Rosenwald. He has nailed big gains of 100% to 280% over six months with deftly timed purchases of two biotech companies, Cell Therapeutics (CTIC, news, msgs) and Neose Technologies (NTEC, news, msgs), in the past four years.
His average winnings in all his trades in these two stocks: 59% and 64%, respectively. As with all the percentage gains listed from here on, these represent the returns generated over the six-month period following purchase. Tellingly, in the past four weeks, Rosenwald was buying shares of another emerging biotech company, Genta (GNTA, news, msgs).
Or consider Tom Ward, president of Chesapeake Energy (CHK, news, msgs), a company that produces natural gas. He’s a veritable Ted Williams. Well-timed purchases of his own company’s shares in the mid-1990s netted Ward gains of 250% to 300%. His average return on trades in his own stock? It’s 66%, according to Thomson Financial.
All told, we found four stocks where all-star insiders bought enough shares recently to suggest they are on to something. On that short list with Genta and Chesapeake are Ivax (IVX, news, msgs), a generic drug maker; and Doral Financial (DRL, news, msgs), which offers home mortgages mostly in Puerto Rico and the New York City area.
We found some losers, too. All-star insiders are ejecting the shares of these three companies from their accounts: Centillium Communications (CTLM, news, msgs), Flextronics International (FLEX, news, msgs) and InfoSpace (INSP, news, msgs).
Unfortunately for individual investors, the Thomson database that lets you find all-star insiders is only available to fee-paying customers, who are mostly institutions. However, individual investors can find plenty of useful insider trading stats and ideas for free at ThomsonFN.com. (See link at left under Related Sites.)
Genta
Our top all-star is Lindsay Rosenwald, a New York-based venture capitalist and hedge fund manager who has degrees in medicine and finance. He clearly knows how to spot a winner, given the gains he’s picked up in Cell Therapeutics and Neose Technologies.
“Those are incredible returns,” says Lon Gerber, an insider expert with Thomson Financial who personally owns shares in Genta. “Rosenwald has a broad record of making successful purchases in the biotech sector for several years.”
Now comes this move: On Sept. 10, Rosenwald paid $15.68 per share for 5,000 shares of biotech company Genta, where he is considered an insider because of his close involvement with the company's financing. (His companies control a majority of Genta’s stock.) Rosenwald's recent Genta purchase is tantalizing. That's because a treatment for skin cancer that's under development at Genta is in the final stages of testing before it can go to the Food and Drug Administration for approval -- and there’s a big debate over whether the results will cut the mustard.
That debate has trapped Genta shares in a range all summer, between $12 and $17. Rosenwald’s September purchase suggests he has strong feelings on which way the tests will go, and how the stock will break out. We’ll know more in November, when Genta is due to release more data on the final trials for the skin-cancer treatment, called Genasense. U.S. Bancorp Piper Jaffray analyst Sandeep Bhatia thinks the final testing will go well, and Genasense might get FDA approval as soon as the middle of next year.
Chesapeake Energy
Dating back to February 1993, Tom Ward, now Chesapeake's president, has made bets on his own stock, netting him 66% gains. Put him on the all-star team roster. At the end of July, this player plunked down $2 million to buy shares of his own company at $9.53. Chesapeake CEO Aubrey McClendon bought $1 million at the same time. “The thing that is interesting with these guys is they bought so much,” says Gerber. “And you are getting high-ranking executives that have proven track records.”
Chesapeake is known for its expertise in deep drilling for gas in western Oklahoma. The company is also an aggressive buyer of rights to gas fields. This fits the business plan because Chesapeake has an intelligence edge in its comprehensive 3-D seismic database.
Chesapeake also is skilled at taking advantage of the volatility in natural-gas prices to enter hedges that lock in high selling prices in the future, says John LaForge, a money manager with the Phoenix-Hollister fund family in Sarasota, Fla.
Recent analyst downgrades based on valuation may be holding this stock back, despite the long-term natural-gas shortage in this country. But these two insider all-stars bought shares at $9.53 apiece, which is not too far below the recent price of around $10.40, so it’s tempting to take a page from their batting strategies and buy shares, too.
Ivax
Ivax CEO Phillip Frost has earned an impressive 40% on purchases of his own stock over the past 15 years. This summer, he was back at the plate, swinging for the fences with a voluminous purchase of his company’s shares. In late July, he snapped up $5.1 million worth of his company's stock for around $17.30 a share.
Since then, Ivax has moved up to the $20 range as sell-side analysts caution that the second half of this year won't bring any pleasant surprises in earnings growth, because costs have risen.
But analysts also expect 2004 to be a bountiful year -- chock full of fresh approvals that will let Ivax begin marketing new generic drugs. They expect victories in legal battles over old approvals, too. That might explain why Frost recently picked up his company’s stock.
Ivax has one of the richest generic pipelines in the industry, including applications to market generic versions of popular drugs like the anti-cancer drug Taxol, the allergy drug Flonase and the anti-depressant Zoloft. The company also may get approval next year for asthma, cancer and epilepsy drugs it’s developing on its own.
Doral Financial
You might think the recent rise in interest rates spells doom for mortgage lenders. Tell that to David Rafael Lewis, a top manager at Doral Financial, and he’ll send you to the dugout. Over the past 15 years, his insider trades have returned him an average six-month gain of 26%.
Lewis is now so confident in the future of the mortgage market that he put $1 million into Doral shares at $40.25 apiece in early August. Doral, whose shares recently moved above $48, has a bright future because it operates in Puerto Rico. The region has a chronic housing shortage that should support demand for homes -- and mortgages -- even if interest rates go up. Doral Chief Financial Officer Richard Bonini and Chairman Emeritus David Levis also bought shares in early August.
Centillium Communications
Centillium Director Shahin Hedayat has a batting average that ranks right up there with Ty Cobb’s, when it comes to dumping shares in the company he co-founded. Over the past two and a half years, Centillium stock has plunged an average of 71% after he’s made sales. Ominously for anyone who is long shares of this company, which produces chips used in DSL equipment, he stepped aside as president in August and was selling again -- 284,600 shares at around $9.40 a share.
Is something bad brewing at Centillium? Sell-side analysts don’t think so. Many have 12-month price targets of around $15 on the stock, which recently traded for $8.60. After all, DSL gear with Centillium silicon is used in Japan, where demand for faster and faster DSL equipment is hot, says Needham analyst Anton Wahlman.
But the problem for Centillium, says Phoenix-Hollister’s LaForge, is that competitor GlobeSpanVirata (GSPN, news, msgs) is starting to make inroads into Japan. “So much of Centillium’s business is out of Japan, and they are starting to lose a little bit to GlobeSpanVirata,” he says. Plus, Centillium faces competition from GlobeSpanVirata and Texas Instruments (TXN, news, msgs) as it tries to branch out by winning new business in other Asian countries like China and South Korea. And the stock looks pricey, with a forward price-to-earnings ratio of 65, and a P/E-to-growth-rate (PEG) ratio of 2.8. Many investors think a PEG of even 1 suggests a stock is fully valued.
Flextronics
Flextronics Senior Vice President Thomas Smach is a real clutch hitter. On average, shares of his company have fallen nearly 30% after he's sold shares of the stock. In the last five weeks, he has unloaded more than $1 million worth of his company’s shares for $12.50-$15 apiece. Ronald Snyder, another accurate seller, got rid of $267,000 worth around the same time.
On the surface, this seems strange, since there’s little doubt that business is strong at Flextronics, a contract manufacturer in electronics. But these insider all-stars might be selling because of forces destined to cap gains in Flextronics shares. First, the shares are pricey, with a forward P/E of 34 and a PEG of 1.6. “We believe shares are fully valued,” says Thomas Weisel analyst Matthew Sheerin. Next, if economic growth falls short of robust expectations, or consumers close their wallets because the home-mortgage refinance boom is over, electronics makers will cut back on how much they ask Flextronics to make.
InfoSpace
Over the past five years, whenever former InfoSpace CEO Naveen Jain sold shares in his company, the stock plunged 26%. Sign him up for the insider all-stars. Unfortunately for anyone bullish on the stock, Naveen dumped another $10.8 million worth on Aug. 25.
It would be easy to dismiss this sale. After all, it happened shortly after a judge told Jain that he owes InfoSpace $247 million because of alleged stock trading violations while he worked there. (Jain resigned as chief executive late last year, but continued as a director until this spring.)
To be sure, his recent sale could be linked to that big judgment. On the other hand, Jain is appealing the ruling, so he’s not going to have to pay for a long time, if ever. And by the calculations of one sell-side analyst, he has realized $400 million selling InfoSpace shares over the years. So he may not be hard-up for cash. All of this kind of speculation is irrelevant anyway, say insider analysts, who typically reject any rationalization for insider selling. To them, a sale’s a sale, so this one counts, especially because it is so large at $10.8 million.
InfoSpace bulls argue that Jain should be sent down to the minor leagues anyway, because the stock has advanced more than 30% to $21.55 since he sold at $15.76. But ominous rumblings from the sell-side analysts suggest Jain may still have the touch at the plate.
U.S. Bancorp Piper Jaffray analyst Safa Rashtchy worries that giants like Google and Overture Services (OVER, news, msgs), which was recently purchased by Yahoo! (YHOO, news, msgs), present formidable competition for InfoSpace in the search-engine sphere. And sales are eroding in the InfoSpace division that supplies content used on cell phones. Those two divisions represent 80% of business at InfoSpace. If ongoing weakness in these areas eats into InfoSpace’s stock price, Jain will keep his place in the insider hall of fame, after all.
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column |
