5 stocks insiders are picking up
When executives pay big money for their companies' shares, that shows their interests are aligned with those of shareholders. Is it time to move on these stocks?
Hedge fund managers like to find management teams with "skin in the game."
It's important to know that CEOs and CFOs own a sizable chunk of company stock, and are therefore as keen to build a rising share price as outsiders. Of course, a lot of these executives get their hands on company stock through the generosity of stock options grants doled out by the broad of directors.
You want to focus on executives that are boosting their holdings by opening up their own wallets. That's truly a way to put some skin in the game.
Here are five companies where solid clusters of buying have recently emerged. (All data provided by InsiderInsights.com.)
1. Internap (INAP)
This provider of data center hosting services has been caught up the recent tech sell-off, and its shares are now roughly 30 percent below levels seen last summer. The downward move has brought out insider support: Director Kevin Dotts bought 10,000 shares last month at $7.73, and more recently, director Debora Wilson has bought the same amount (at $6.79 a share).
Though shares have slumped, business trends are solid. First-quarter sales rose 11 percent sequentially and 18 percent from the first quarter of 2013, thanks in part to an expansion of Internap's business model: "The (first-quarter) report supports our thesis that Internap is in the midst of a fundamental corporate transformation from an Internet service provider (ISP) to a cloud computing and data center service provider," note analysts at D.A. Davidson who rate shares a "buy" with a $9 price target.
2. Sally Beauty Holdings (SBH)
This provider of beauty supplies said last week that Chris Brickman, a top executive at Kimberly-Clark (KMB), would be taking the company reins, replacing a retiring executive. Brickman inherits a company that has posted a steady annual expansion in operating profit margins, which doubled from 7.5 percent in 2006 to 14.4 percent in 2013. In support of the solid financials, the company announced a $700 million share buyback plan last month.
As a show of support for the stock, which has lagged behind the S&P by 30 percentage points over the past year, Brickman has just bought 20,000 shares at around $25 apiece. He presumably was rewarded with stock options as well, and taken together, now has ample skin in the game.
3. New Residential Investment Corp. (NRZ)
This real estate investment trust (REIT), which focuses on residential mortgage related assets, priced its IPO at $7 a share a year ago, and now trades for around 10 percent less.
The REIT has produced an $0.18 a share quarterly dividend in each of the past two quarters, or $0.72 a share on an annualized basis. If that can be maintained, then investors are looking at an 11.5% dividend yield.
In response to the post-IPO slump (and that juicy dividend), CEO Michael Nierenberg recently bought 1 million shares (as part of a rights offering priced at $6.10 a share). Look for Nierenberg and his management team to provide a fresh view on the dividend plans when quarterly results are released May 14.
4. Unifi (UFI)
This maker of industrial fibers is still waiting for an economic expansion to boost sales. They've barely grown in recent years, and remain below the $800 million annual sales base the company had a decade ago. But management is doing a fine job of squeezing out profits, even if the top line remains constrained. In the first nine months of fiscal (June) 2014, net income tripled from the previous year, to $20 million.
Still, investors have grown impatient waiting for sales growth to resume and have pushed this stock down 20 percent since the year began. In response, Unifi has just embarked on a second consecutive $50 million buyback plan. And the actions by director Ken Langone (who co-founded Home Depot (HD)) is equally impressive: Since the year began, he has bought 53,000 shares at an average price of around $23.
5. MVC Capital (MVC)
Three different insiders at this business development company (BDC) have been aggressively buying shares for nearly a year, culminating with $650,000 in stocks purchases in April. Investors in BDCs seek out high yields, but MVC's 3.9% yield isn't especially impressive.
Perhaps insiders are lured in by the fact that this stock trades well below net asset value (NAV) of $17.36 a share. Notably, management has been shifting the portfolio toward income-producing assets (meaning more loans and less stock), and the base of assets should start to create better yields in the years ahead. Still, acquiring shares at a 25 percent discount to NAV is a no-brainer -- at least according to these insiders.
Other companies with impressive recent insider buying include:
• GrafTech Internatonal (GTI)
• Carriage Services (CSI)
• Clearfield (CLFD)
Risks to consider: Insiders sometimes reflexively buy when the market (or their stock) goes down, though it's impossible to time the market, and their buying actions may prove to be premature.
Action to take: Consider insider buying signals as starting points for your research. Also, such buys can quickly be followed by a run-up in the stock price, so you need to compare their purchase prices and current prices to be sure you didn't miss the boat.
David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.
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Shares fell 9 percent during the quarter, which offers a compelling entry price now.
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