Insider stock purchases are often viewed as indicators of an undervalued stock. Insider sales are sometimes seen as a sign of an overvalued stock (though they are often more difficult to decipher than purchases). The reasoning for these views is pretty simple: insiders should know the most about their companies; so if they are buying or selling, others should consider following their lead. Of course, this doesn’t always work out as well as investors hope, but insider buying and selling can be a valuable tool in identifying potential investments or as a way to tip the balance when already considering purchasing or selling a company’s shares.
With this in mind, Value Line runs a regular screen of insider buying and selling in the back of the Selection & Opinion section of The Value Line Investment Survey. This time around, the screen turned up interesting insider buying at Dish Network (DISH), PharMerica (PMC), and Titanium Metals (TIE). Selling activity, meanwhile, was seen at Medicis (MRX).
Dish Network
DISH Network Corporation was founded January 1, 2008 when predecessor company EchoStar Communications separated into two different companies. Dish Networks provides direct broadcast satellite television service in the United States to almost 14 million customers. It offers access to about 500 video and audio channels, as well as digital video recorders and interactive television applications. DISH also offers Latino and International programming, as well as high-speed Internet service.
DISH Network lost approximately 19,000 net subscribers in the second quarter, but added approximately 218,000 net subscribers for the six months ended June. The more recent three months, however, reflected the fact that the overall growth rate in the pay-television industry has slowed in recent years and, with that slowdown, competition for customers has intensified. The company’s total revenues were up 9.1% in the second quarter compared to the same period in 2009, with earnings per share of $0.57, compared with $0.14 in the same quarter of 2009. Despite this largely positive earnings news, the loss of subscribers in the second quarter is worrisome. Also, a lingering concern is a legal dispute with TiVo (TIVO) that could, at least temporarily, force DISH to remove digital video recording features from its offerings.
Despite these negatives, however, a DISH director recently added 50,000 shares to triple his holdings of the company’s stock. This suggests that at least one insider believes the outlook is positive, which may help to alleviate some investors’ concerns about the recent downturn in subscribers and the Tivo lawsuit.
PharMerica
PharMerica Corporation is a leading institutional pharmacy services provider to healthcare facilities and hospitals. It operates more than 100 institutional pharmacies in the United States. The company also provides pharmacy management services to 85 hospitals. The pharmacy business accounts for more than 95% of the company’s revenue, with Hospital Management providing the rest.
The company’s shares traded sharply lower after it posted weaker-than-expected results during the second quarter. The company was hindered by soft underlying fundamentals in its core markets, since hospitals have started to utilize generic reimbursements more aggressively. One key factor that in the past attracted customers to PMC was its pricing and incentives. However, in the current climate this presents a double-edged sword, with the unwanted consequence of margin compression. All told, PharMerica's profitability was hurt, resulting in a 29% year-over-year decrease in earnings.
The shares are still well below their level prior to the second-quarter earnings announcement. The CEO of the company appears to be taking advantage of that low price, since he and his family purchased around 80,000 shares in mid August (brining his total to about 400,000). A number of officers and directors have also purchased shares in PharMerica, though not nearly as many as the CEO. It would appear that some knowledgeable insiders believe the selloff is overdone and that the long-term picture here is brighter than it now appears.
Titanium Metals
Titanium Metals Corporation engages in the production of titanium sponge, mill products, and industrial fabrications. The company sells its products through its sales force in the United States and Europe, as well as through independent agents internationally. It’s primary customers are the commercial aerospace and military, oil and gas, automotive, and power generation industries. In 2009, North America accounted for 65% of sales; Europe, 22%; and other, 13%.
Shares of Titanium Metals have advanced sharply over the past year. Moreover, we expect that long-term favorable trends in demand for titanium products will be a clear positive for bottom-line results through at least 2013-2015. This view is based on our belief that demand for a new generation of more fuel-efficient planes (that will require more titanium) is headed higher. The runup in price, however, has reduced some of the share price appreciation we forecast over that time period. That said, it appears that an insider may think that there is more room on the upside. Indeed, this director recently nearly doubled his position Titanium Metals’ shares. This adds to the already impressive level of insider ownership at the company where officers and directors control over 50% of the company’s common stock.
Medicis
Medicis Pharmaceutical Corporation offers prescription and non-prescription products to treat dermatological conditions. The company has a four-part growth strategy that includes: expanding sales of existing brands; launching new products from intensive research and development efforts; acquiring complimentary products and businesses; and collaborating with other companies. The company sells its products primarily to wholesale pharmaceutical distributors.
Medicis Pharmaceutical is on a roll, though bottom-line comparisons may prove less favorable in the second half of the year, considering the fairly strong earnings showing in the third and fourth quarters of 2009. Still, the company appears well positioned in the markets it serves and its finances are in good shape. As such, we expect continued revenue and share earnings gains at the company out to 2013-2015. The company’s share price, however, is well above its level of a year ago. The fact that the CEO recently sold 400,000 shares, about a third of his holdings, in mid-August, suggests that he may believe that a near 50% advance in one year’s time is too good to pass up. Other insiders were selling around the same time, too. While some of the activity may have involved options, when a group of insiders chooses to sell at about the same time, investors would be ill advised to ignore the transactions.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.
