Two Stocks with Bullish Insider Buying

By David Sterman of StreetAuthority

NEW YORK (StreetAuthority) -- As part of your ongoing investment research, it pays to periodically check in with company insiders. When they are buying or selling a company's stock, you'll get a first-hand suggestion on whether shares are a bargain or possibly ripe for a fall.

Decisions on when to sell a stock can be influenced by other factors such as estate planning or wealth diversification. But insider buying is a clear unabashed signal -- "our stock is too cheap," insiders seemingly implore. Last month, insiders clued us in to two stocks that are undervalued, at least in their opinion. Let's take a closer look.

Lincoln Educational

The for-profit education sector had a bruising year in 2010, thanks to disappointing graduation rates, lax lending standards and sharply increased government oversight. The net result: Several major players may run into distress in 2011 as government-supported student loans will be harder to come by.

The industry pressure may turn out to be a blessing for the industry's stronger operators, such as Lincoln Educational (LINC). The N.J.-based firm focuses on trade-based degrees in fields such as health care, IT and auto repair. Chastened by a rising tide of unpaid student loans, Lincoln has been tightening its standards in recent quarters, and is now working to ensure that all student loan applicants will be in a strong position to repay loans. That means fewer students will be enrolled in 2011 leading revenue to fall this year. Yet management notes that the applicant base continues to rise at a fast pace, and it expect sales and profits to rebound in 2012.

But even as Lincoln Educational works to improve its image, shares languish some 40% below levels seen earlier in 2010, and they now trade for just seven times projected 2011 profits. That low multiple led a pair of company directors to snap up more than $5 million in stock a few weeks ago. To make money on that investment, they'll need to see Lincoln Educational consistently deliver results that are ahead of newly lowered expectations. That process may have already begun: Profits have exceeded forecasts by at least 10% in each of the last two quarters.

To bring attention to the stock, the company is also buying back shares and recently initiated a dividend of $1 a share, good for a 6.5% yield. That largesse stems from an earnings before interest, taxes, depreciation and amortization/enterprise value of around three. Barrington Research figures that multiple will eventually rise up to five, implying 70% upside in Lincoln Educational's shares.

Lincoln's stock took another hit as rival Strayer Education (STRA) cautioned that enrollment is dropping. Lincoln Educational has already discussed enrollment trends at length, and as noted is expected to see a decline in enrollment in 2011 and a rebound in 2012.

Dollar General

When discount retailer Dollar General (DG) delivered solid fiscal third-quarter results on Dec. 6, insiders were likely taken aback by a sudden 7% selloff in the company's stock. Investors were likely concerned that the growth in same-store sales declined for the third straight quarter to around 4%. Heck, in this tough economy, that kind of growth is still impressive. Insiders agreed as range of them added to their holdings of the company's stock just a few days later.

To be sure, same-store sales growth could settle into the low single-digits as long as the economy remains under pressure. To boost growth, management subsequently announced plans to open more than 600 stores over the next two years. Yet it's the bottom line that has been receiving the bulk of management's attention. Since taking the reins in 2008, Chairman and CEO Rick Dreiling has overseen a range of initiatives including:

• Moving the retailer into new product categories that offer higher margins;
• Sharply boosting the number of private label goods for sale;
• Expanding shelf space and store hours.

That's why analysts think profits rose around 40% in the fiscal year that ends in a few weeks, and are expected to rise another 20% in fiscal 2011. Those store openings surely help: Dollar General typically generates greater than 50% returns (in terms of annual cash flow) on the expense of each new store opening.

Citigroup's Deborah Weinswig thinks shares have 30% upside to around $41, She thinks this isn't just a faddish recession play. Surveys indicate that many new shoppers plan to stick with the retailer and its low-price offerings even when the economy improves.

Action to Take: Insiders tend to step in and buy shares when they think investors have an overly bearish view. Shares of Lincoln Educational now look far too cheap, even when considering the for-profit educations sector's woes. Dollar General's shares aren't quite so cheap, but the retailer's impressive string of profit gains looks set to continue for quite some time. Either stock is worth considering on these merits.

This article originally appeared on StreetAuthority.

At the time of publication, Sterman owned no positions in the stocks mentioned.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.