Peter Lynch, one of the most astute stock analysts of our time, once wrote that when corporate insiders make large purchases of their own stock with private funds, it means they either feel the company is undervalued, or that something very good is about to occur.
I have noted here before that insider buying is a much better predictor of future stock movement than insider selling, because while selling happens for any number of reasons, insider buying occurs 99% of the time because insiders are certain their stock will appreciate in the near future.
With that in mind, I often spend some time perusing insider transactions, looking for significant transaction numbers. For example, one situation I note is when several corporate insiders are buying up shares of an inexpensive stock, or one that has recently been beaten down in price.
One extraordinary example of this occurred in September 2011, when several insiders at Jefferies Group (NYSE:JEF) bought millions of shares of their declining stock between $11.35 and $12.58 per share over a short time frame. After trading lower for the next six weeks, JEF then turned around, and by April 2012 it had catapulted up to $19 per share.
While several insiders buying shares carries more weight than just a single insider’s purchases, when that lone buyer snaps up shares at a heavy and sustained rate, that too often signals that the company’s stock is about to improve considerably.
With this in mind, I call your attention to significant insider transactions at Opko Health (NYSE:OPK), a Miami-based company working on the discovery, development and commercialization of pharmaceutical technologies and medicines.
Opko is a diversified company whose research includes developing molecular-level diagnostic tests to identify biological markers for treating Alzheimer’s disease and several types of cancers. In addition to U.S. sales, many of Opko’s pharmaceutical products are sold overseas in Israel, Mexico and Chile. The company has received funding for its medical technology systems operations in poor areas of Africa from the Bill and Melinda Gates foundation, the World Bank, the Norwegian Government, and agencies in the U.S. and Canada.
Opko has developed a drug to prevent chemotherapy-induced nausea and vomiting, called Rolapitant, which is now in Phase 3 testing. An FDA decision is expected on Rolapitant before the end of 2013. Opko has a licensing agreement with Tesaro (NASDAQ:TSRO), an oncology-focused biopharmaceutical company, and is eligible to receive up to $121 million in funding. Opko says that Rolapitant, once fully approved, has the potential to gross up to $1.25 billion.
Over the past several months, insider purchases have outnumbered insider sales by a whopping total of 6.3 million to only 50,000. Even more amazingly, all of the shares have been purchased by CEO Phillip Frost, who now owns more than 121 million shares. He purchases thousands of shares on an almost daily basis, and they’re almost always bought indirectly through Frost Gamma Investment Trusts.
Perhaps as a result, the share price of Opko has risen a whopping 65% from $4.23 in November 2012 to Friday’s closing price of $6.99.
However, we must ask, is the stock price increasing because of an improving story line or fundamentals, or is it strictly due to Frost’s purchases? A momentum investor who buys OPK certainly could profit from ongoing insider buying. However, what happens to the stock if and when that massive insider buying comes to an end?
Click to Enlarge An even worse scenario would be if Frost chooses to unload a huge amount of stock that was originally purchased at much lower prices. As recently as 2009, OPK stock sold for less than a dollar per share. As the accompanying two-year weekly chart shows, OPK traded sideways to slightly lower for about a year before its recent ascent. During that time, Frost also was purchasing thousands of shares per week, but, as the accompanying chart shows, the stock didn’t budge.
So either more investors have just been jumping on the insider bandwagon lately, or other forces are at work to propel this stock higher. But any significant amount of insider selling could trigger a huge decline in share price, particularly as other investors become aware of it, and start dumping their shares as well.
Investors should keep in mind that OPK is a high-risk stock right now for several reasons, including:
- The stock is fairly well-extended with its recent huge spike upward.
- The technical indicators are all at very overbought levels.
- There is no guarantee of an FDA approval of Rolapitant, and should the FDA choose to delay approval, the stock would sink like a stone.
- OPK’s fundamentals are still very weak. It has negative earnings and thus no P/E ratio, the price-to-book is a whopping 14.05, it has a -12% ROE, and OPK pays no dividend.
Therefore, OPK is a stock for investors who are more risk-tolerant or have a longer-term view.
However, despite the flawed fundamentals and overextended chart, the company’s endeavors and funding sources are quite diversified. Should Opko suffer a setback — for example, on Rolapitant approval — it still would have plenty of other successful business ventures to fall back upon.
In fact, any delay on approval and subsequent hit to the stock would provide an excellent value play.
And, of course, there is always that insider buying to provide fodder for momentum players …
As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.