Some Big Names Emit Strong Insider-Buying Signals

Jonathan Moreland is publisher of InsiderInsights.com, a Web site that analyzes insider trading. He writes a weekly column that appears on this page as part of his business relationship with TheStreet.com.
Author:
Publish date:

I view insider buying at large, well-known firms with a different set of lenses than I do at small-caps. This is simply because you just don't see a lot of insider buying at the really big companies -- especially the clusters of buying that reveal an internal consensus that things look rosy for a stock's future.

Sure, beneficial owners of shares may move hundreds of millions of one of the big boy's shares, but more often than not, such moves are the result of a corporate action, share transfer or other reason that makes us overlook the buy as a signal of value.

The reason for the lack of significant insider-buying signals at mega-caps is open to debate. But I think it stems from the fact that once an executive becomes a Form 4-filing "insider" by the Securities and Exchange Commission's definition, he or she is making such a large salary and has such a large potential dollar gain from incentive stock options, that it becomes unnecessary for the insider to buy the companies' shares in the open market to profit greatly from the company's success.

Now, however, the options of a lot of insiders at many huge companies are underwater, and so there's more reason for insiders to buy if they truly feel optimistic about their company.

Below are several big companies that have recently had insiders buying. In my opinion, the buying at these firms is significant, and their shares are good purchase candidates for investors with at least a one-year time horizon.

Applied Micro Circuits

Applied Micro Circuits

(AMCC)

has already more than doubled from the lows it hit Oct. 3, but the two insiders who purchased at the end of September probably expect more gains over the next year.

Chairman David Rickey bought 650,000 shares for between $6.44 and $9.95, and Vice President Candace Kilburn's purchase of 8,200 shares were all at prices above $9. Mr. Rickey's investment amounted to more than $5 million and more than tripled his direct holdings. Both executives were last seen exercising stock options in January 2001, when Applied Micro fetched $70 to $80. They didn't see value when the shares merely halved in price, but waited until their stock fell below $10 to signal a bottom, and it looks as if they may just have got it right.

Applied Micro makes computer chips to facilitate voice and data transfer through fiber-optic networks. Unfortunately for the company, these products are not expected to be the best wares to peddle in 2002. But losses for Applied are at least expected to narrow next year, and at the end of September, AMCC was trading for one of its lowest

price-to-sales and

pricetobook price-to-book ratios ever.

Goodrich

Goodrich

(GR)

is a $2 billion

market-cap company, but it has recently generated the type of strong insider-buying signal I am used to seeing at small-cap firms. Nine executives purchased $4.4 million worth of Goodrich in September at an average price of $19.14. Many of these buyers have bought and sold their shares well in the past, too.

Goodrich had been trading in a relatively tight range until Sept. 11, after which it was cut in half to a low of $15.91. With 75% of its revenue coming from supplying parts and services to the commercial airline industry, this was to be expected.

On Oct. 25 Goodrich released its third-quarter earnings and outlook for the coming year. The third quarter was good, but earnings for the company are expected to decline next year, and it announced that 2,400 employees will be let go.

Investors took the news in stride, focusing on the bright side and most likely thinking that all the bad news was priced into Goodrich beforehand.

What is the bright side? Well, although earnings will decline next year, at least Goodrich can still generate profits in a recession that has affected its commercial airline customers particularly harshly. And even after bouncing back recently, Goodrich still trades for just 8.8 times consensus 2002 earnings-per-share expectations of $2.58. Even the layoffs have a positive spin in that they will generate annual savings in excess of $125 million. Finally, there is an anticipated increase in demand for Goodrich's military, space and industrial gas turbine products.

NCR

NCR

(NCR) - Get Report

announced horrific quarterly results Tuesday, Oct. 23, but still ended that week up more than 7%. When bad news stops pushing a stock down, it either means that the worst is over or that investors are on drugs.

NCR's operating profit fell by more than half during its third quarter, mostly because of weak demand for its data warehousing business. The company also said analysts were too optimistic for the fourth quarter, steering them to expect operating earnings of 70 cents to 75 cents a share instead of the 87 cents-per-share consensus estimate. And in case anyone still thought NCR was sugarcoating its financials, it threw in $43 million in charges. The one bright spot (or, at least, the one less-dark area) was ATM sales to Europe and Asia.

One of the few people who seems to have expected the ho-hum reception for the forgettable quarter was the man who announced it -- NCR's chairman, Lars Nyberg, who bought more than $350,000 worth of NCR at just over $35 a share at the end of September. CFO Earl Shanks increased his holdings substantially at about the same time with a 9,500-share buy. These were the first insider purchases in nearly a year, during which time numerous execs, including Mr. Nyberg, have been heavy sellers.

In the past, Mr. Nyberg has shown excellent timing at trading NCR . He was a buyer way back in 1997 and 1998, and he was smart enough to take profits in 1999 and this year.

Although the relatively good ATM sales are nice to see, NCR's future rests more heavily on its presently sagging data warehousing business. Weak telecom and retail store sales next year do not bode well for this product line, but insiders are obviously looking beyond this recession. NCR

does

have earnings, though, unlike some other beaten-down large-caps. It is also expected, for now, to increase its bottom line to $2.12 a share next year, and has a fairly solid balance sheet as well.

To be sure, it's been tough thinking about NCR as a long-term holding. Its five-year price chart looks like the zig-zag on Charlie Brown's shirt. But Mr. Nyberg has managed to make money from these gyrations in the past, and he obviously intends to now.

Jonathan Moreland is director of research and publisher of the weekly publication InsiderInsights and founder of the Web site InsiderInsights.com. At the time of publication, Moreland had no position in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, Moreland invites you to send comments on his column to

jonathan@insiderinsights.com.

TheStreet.com

and Moreland are parties to a joint marketing agreement relating to

InsiderInsights

, a weekly newsletter written and owned by Moreland. Under the agreement,

TheStreet.com

provides marketing services, including promotion of

InsiderInsights

on

TheStreet.com's

Web properties and in his columns that appear on those properties. In exchange for these services, Moreland shares with

TheStreet.com

a portion of the revenue generated by subscriptions to

InsiderInsights

resulting from those marketing efforts.