NEW YORK (Stockpickr) -- It often pays to follow the moves of insiders. If they're buying up company stock with their own funds, then they are quite often pointing the way to an undervalued investment opportunity.
Trouble is, soon after insiders buy, a stock starts to rise higher as other investors follow the insiders' lead. By the time you get around to researching that stock, it may already be 10% or 20% above the level where insiders bought in.
Yet it works the other way as well. Share prices sometimes fall after insiders have started buying, to below levels where they bought in. If insiders liked the stock when it was a bit higher, they presumably love it now that it's a bit cheaper.
that are trading below the recent average insider purchase price. If the market grinds lower and pulls these stocks down further, insiders may lend their support once again.
Let's take a closer look at
Heading up the list is fast-food operator
. Nelson Peltz and other key investors (known as insiders as they each control more than 5% of company stock, sit on the board and are privy to insider information) have been trying to unlock value at Wendy's for many years.
Roughly a half decade ago, they brought roast beef food chain Arby's into the mix, figuring that the combined entity could reap major synergies in terms of cost-savings from shared overhead. That strategy failed miserably, and Arby's was sold off in 2011. Peltz and others then sought to rejuvenate the core Wendy's brand by bringing in restaurant industry veteran Emil Brolick to run the show. He had considerable success at rival
, and since he took the reins at Wendy's, has announced a far-reaching set of goals to spruce up stores and upgrade the menus.
Peltz and his cohorts liked the new plan so much that they ponied up more than $100 million to buy even more company stock in recent weeks. Trouble is, Brolick's plans call for heavy spending now, with (hoped for) rewards in 2013 and beyond. And you know how Wall Street hates to hear that spending is rising and profits will be falling. So they're pushed the stock down to levels below where Peltz and friends were buying.
Still, these insiders' far-sighted investment plans may eventually pay off in a big way as this stock is far, far cheaper than
stock by a range of metrics.
( GEOY) is another big purchase by a major shareholder that has yet to pay off. Cerberus Capital has been steadily building an ever-larger position in satellite imaging provider GeoEye, which is one of two companies that provide high-resolution intelligence data for the U.S. and other governments.
Shares have taken a recent hit as budgetary pressures may make it hard for GeoEye to partake in a new advanced imaging project, known as Enhanced View. Even after those concerns have circulated, Cerberus has continued buying stock, averaging down at ever-lower levels.
Paradoxically, if the U.S. government chooses to diminish its relationship with GeoEye, it could help the company snag an increasing level of foreign business, as it would no longer be seen as a captive U.S. client. At least that's what Cerberus is likely hoping will happen.
GeoEye was also featured recently in "
busted out of the IPO gate in late 2010, translating an opening day pricing in the mid-teens all the way up above $30 by early 2011. A year later, shares are down to $5, the company's production plans have been delayed, and the bank account needed to be replenished.
So the hefty insider buying you see above is simply insider purchases on a recent secondary offering. Shares have fallen another 10% since that secondary was completed.
Still, this is a business with a great deal of promise. Amyris takes a basic organic material such as sugarcane and uses yeast and other microbes to convert it into industrial chemicals. Those end-product chemicals were typically made with either crude oil (which is currently quite expensive) or natural gas (which is currently quite cheap). So Amyris' success largely depends on what specific chemicals it will end up focusing upon to be economically viable.
After some recent setbacks, the company now thinks significant production volumes won't arrive before 2014, though the recent capital raise mitigates any cash burn concerns for now. These insiders are clearly in it for the long haul, and it may be a number of quarters before investors again flock to this promising business model.
A great deal of (digital) ink has been spilled by insider-focused analysts trying to determine what Dr. Phil Frost is up to. He's chairman of
and has been buying large sums of stock almost every month for more than a year.
Frost sold Ivax Pharmaceuticals to
for $7.4 billion back in 2006. Ivax had built an impressive roster of top-selling generic drugs, and it was pretty clear why Teva would pay such a stiff price tag.
Opko's story isn't quite so clear-cut. The company is casting a wide net, targeting vaccines, diagnostic tests, treatments for infectious diseases, asthma, cancer, and on the list goes. Yet this is a company with just $40 million in annual sales, steady operating losses, and minimal communication with the investment community. The fact that it is already valued at $1.4 billion means that Dr. Frost is either sitting on a blockbuster of a company, or he is the most foolish insider buyer ever.
More than likely, he's on to something special. He's no fool. So investors are left to have blind faith in him.
At least the stock is now below levels of recent insider buying, providing safety. You can bet Dr. Frost will be buying stock next week, next month and next quarter, if history is any guide.
, a maker of "non-lethal" firearms for police departments, is far from its 2007 heyday, when shares moved above $30. These days, it's around $4, partially as a result of tight government budgets that have slowed orders.
Still, sales appear stable at current levels and could rebound anew considering state and local tax receipts are starting to rise and the era of municipal budget cuts appear to be winding down. At least that's what Taser's insiders are counting on.
Follow Stockpickr on
and become a fan on
Stockpickr is a wholly owned subsidiary of TheStreet.com.
At the time of publication, author had no positions in stocks mentioned.