Two Stocks That Pass the Insider Test

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 <I>TheStreet.com</I>.
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This week I'd like to share a couple of good investment ideas that insiders recently brought to my attention.

As I've said before, I don't buy stocks just because they have significant insider purchases. That is simply my first screen to determine what companies I focus my fundamental research on. If a stock meets both my insider and fundamental criteria, I then look at the chart to better time an entry and to help set price targets and stop-losses.

These two plays --

Winn-Dixie

(WIN) - Get Report

and

Express Scripts

(ESRX)

-- pass all three of my tests. They have attractive risk/reward profiles that make them solid additions to a well-balanced portfolio.

Winn-Dixie Stores

This grocery-store operator recently restructured, trimming its stores by 10% to 1,153. More than half of the remaining stores were renovated, leaving Winn-Dixie a leaner and meaner competitor.Operating in the Southeastern U.S. and the Bahama Islands, Winn-Dixie has been publicly traded for two decades, its stock rising from single digits to a high of $60 in early 1998. But WIN collapsed to a 52-week low of $10.22 on Oct. 25, and is now trading at about $14 -- prices not seen since the late 1980s.

WIN's plunge came after management lowered earnings guidance on Sept. 25 and switched to a dividend policy that is less advantageous for shareholders.

The restructuring obviously caused a bigger hit to earnings than expected -- trimming them by 31%. Instead of earning the expected 26 cents a share for the quarter ended in September, Winn-Dixie earned only 18 cents. Same-store sales comparisons were once again negative. For Winn-Dixie's next fiscal year, which ends June 27, 2002, management reduced guidance to between $1.05 and $1.20 a share.

WIN promptly gapped down 40% after the preannouncement, as disappointed investors threw in the towel. Among them were any investors who looked to WIN for the income. Under the old policy, the dividend yield would have been 7.7%; under the new policy the stock's indicated dividend yield is just 1.5%.

Six insiders saw a buying opportunity and purchased nearly 45,000 shares in September and October for between $11.01 and $12.10 each. This is a solid buying cluster of a respectable dollar amount of shares. Several of the insiders added significantly to their holdings as a result of the purchases, and two of the insiders have traded WIN profitably in the past.

I am following these execs. As bad as the news was for investors holding WIN on Sept. 25, the selloff has given new investors a good entry price to bet that Winn-Dixie's restructuring plan will finally pay off.

Even though the September quarter was disappointing relative to prior expectations, the company still increased earnings per share 136% year over year. Sequentially, EPS increased 72% -- on slightly less revenue to boot. I expect the company's margins to continue increasing over the next year, and for WIN to once again reach the high teens or low $20 range.

Express Scripts

Shares of this pharmacy-benefit management company have fallen by more than a third from the $60 they fetched at the beginning of October. Much of the decline came from the Oct. 18 announcement that

WellPoint Health Networks

(WLP)

will acquire

RightChoice Managed Care

(RIT)

.

This means that WellPoint will be taking over Express Scripts' contract with RightChoice when it expires in the second quarter of 2002. It also follows that Express is now expected to increase earnings by only 25% next year, to $1.95 a share, instead of the 30% growth that was previously considered possible.

Analysts still appear positive on ESRX, though, with 19 rating the stock a buy or strong buy.

Insiders agree, and bought into their stock's decline. Three executives purchased a good amount of ESRX in October at an average price of $40.75. There were also a couple of nibbles by insiders in September at prices as high as $49. This is a big change from the constant insider-selling ESRX has experienced since July 2000.

But there are concerns for the PBM industry that investors must follow closely. Increased governmental regulation via a "patients' bill of rights" has been floated in D.C., and there is debate about the near-term direction of health premium prices.

Although health care reform has been put on Congress' back burner to focus on the sagging economy, a price war is still possible. Express Scripts has a good history of adding customers, however, so any price decline should at least be somewhat offset by an increased number of contracts.

It's also worth noting that Express expects the adoption of FASB (Financial Accounting Standards Board) Statement No. 142 in 2002 will increase reported EPS by 33 cents a share above current estimates. This should be a nonevent, but, if anything, could distract investors from any pricing pressure.

For me, though, the anticipation of solid bottom-line growth and continued strong cash flow make it a good time to bite on ESRX.

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.