Insider buying is almost always considered an excellent vote of confidence by management in its own product. Why would anyone — even a really wealthy executive — risk even a dime of his own money buying a stock he believed to have crappy prospects?
If one assumes that a 4% to 6% return can be easily had with bonds or other fixed income investments, then one can assume that an officer’s insider buying is attributed to a belief that he can beat those returns.
With insider selling, you can’t be sure if the sales are merely the result of management diversifying their financial planning or if the company is in heaps of trouble. One can make any excuse for selling. For insider buying, however, it likely foretells good times ahead for the company.
Indeed, since insiders by their very name know how the company is doing before it reports to the public, that’s all the more reasons to follow these purchases closely.
Here are three in particular that have my eye:
Stocks to Buy on Insider Buying – Consumer Portfolio Services (CPSS)
There has been a run of insider buying at Consumer Portfolio Services (CPSS), a company that operates in a space I know very well.
Consumer Portfolio Services deals in nonprime auto sales, by offering financing to customers through various dealers. These tend to be high-APR loans with high margins. In addition, CPSS will purchase portfolios of performing auto loans, as well as service others.
CPSS is held up by its securitization platform, in which it bundles these loans and offers the cars themselves as collateral, from which it pays a distribution to the buyer of the bundles in exchange for their investment. Should any given automobile owner default on his payment, the car is repossessed. CPSS then takes the money raised and uses it to purchase other portfolios or to originate new loans.
One company director purchased 80,700 shares since late July, investing more than half a million bucks into the company.
I think CPSS stock is insanely cheap here at just above $7. Consumer Portfolio Services generates tons of free cash flow because there is virtually no capital expenditure. Operating cash flow tripled from FY11 to FY12, then tripled again to FY13. The company is growing EPS at over 20% annually, and FY14’s estimate of 88 cents suggests CPSS stock should be trading at over $17. I am long.
Stocks to Buy on Insider Buying – American Tower (AMT)
It’s hard to believe that American Tower (AMT) traded at $1.41 back in 2002. Today it sits at an all-time high of $97.
AMT is a real estate investment trust, or REIT, that handles wireless and other communications real estate, whether it be leasing antenna space to wireless providers or TV or radio. AMT stock has loaded up considerable on debt, from $8 billion to $14 billion this past year, but its return on capital has been historically strong, with net margins at a fabulous 19%.
I think AMT stock a bit pricey here at about 40 times earnings, but insider buying from director Ron Dykes has me reconsidering.
Dykes just purchased 2,900 shares, which is more than a quarter of a million dollars — and if he’s buying AMT stock so high in an upswing, it still might be worth a look.
Stocks to Buy on Insider Buying – Republic Services (RSG)
With more than 330 collection operations, 190 landfills and 70 recycling centers across 39 states, Republic is trash royalty. Trash is a capex-heavy business, but it is also a cash flow-generating business. So while RSG dumps some $900 million annually into capex, it pulls in $1.5 billion to $1.7 billion annually in operating cash flow.
RSG stock is, at best, a Peter Lynch stalwart with only 8% EPS growth. However, it’s the cash flow that has attracted both insiders and private equity.
Director Wallace Nutter did some insider buying last month, snapping up $1.14 million worth of the stock on July 31, giving the company a great vote of confidence.
I suspect this might be because Cascade Investments, a private equity firm, has been buying up stock. Cascade has purchased well more than $200 million of RSG this summer alone, and now owns north of 23% of the outstanding shares.
Private equity loves reliable cash flow. I suspect Cascade will aim to take the company private. If an insider bought in, you might want to also.
As of this writing, Lawrence Meyers was long CPSS. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets at @ichabodscranium.