This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To make sure you don’t miss any of Tom’s potential 100x picks, subscribe to his mailing list here.
The Collective Delusion of the Stock Market
On Tuesday, Apollo (NYSE:APO) Co-President Scott Kleinman warned that record-low interest rates were driving a “collective delusion” on deal valuations.
Before you sharpen your pitchforks and march over to his house, consider that the experienced dealmaker has seen his share of booms and busts since joining the private equity firm in 1996. And according to consultancy Bain & Co., two-thirds of buyout deals now price above 11x EBITDA (earnings before interest, taxation, depreciation and amortization).
The mania has spilled into public stock markets too. This month, the Shiller P/E Ratio, a measure of long-term stock valuations, hit its highest level since the 1999 tech bubble.
It’s no surprise insiders have sold $14 billion in stock since the start of November, 40% more than during the same period last year. If someone offered me $21 billion for my 10% stake in Tesla (NASDAQ:TSLA), I’d feel fat-headed if I didn’t at least consider the offer.
Yet some corners of the market are still buzzing. In the past month, insiders have splashed out another $83 million on shares they already own — a significant figure when looking at market valuations.
Today, we’ll dive into five companies that insiders are still buying. With markets trending so high, we’ll need all the help we can get to avoid the collective delusion.
Treading Carefully Around High Stock Prices
This week, the insider sale/purchase ratio hit its highest level since the summer. The ratio, calculated by dividing the median 10-day trailing sales by the median 10-day trailing buys, has been a reasonably good indicator of trouble. The S&P 500 index — a basket of large U.S. companies — has dropped from its record highs each time the index has crossed 50x.
Of course, the sale/purchase ratio can’t predict every decline. This insider Ouija board would have missed the drawdown in mid-August and a rather painful 5% drop in September.
But much like a car’s “check engine” light, the presence of a warning signal is enough to sound the alarm. As insiders continue to head for the exits, they’re telling us, “be selective in the stocks you buy.”
5 Stocks Insiders are Buying: Osisko Mining (OBNNF)
In October, Canadian gold exploration firm Osisko Mining (OTCMKTS:OBNNF) was flagged by the Insider Track strategy.
“I suspect that right now, Osisko executives know something that we don’t,” I wrote in my Oct. 5 newsletter. “Hint: it likely involves a new mining site.”
And just like clockwork, OBNFF announced they had struck gold. Drill holes at its appropriately-named Osisko Windfall site revealed gold deposits of up to 40 times greater than required for profitable mining.
Shares have since climbed 15%.
Yet that isn’t the end of the story. Since then, Chairman and CEO John Burzynski has continued to double down on the company, adding another 186,000 CAD ($148,000) in stock to top off the shares he already bought.
That’s giving investors a second chance to buy OBNFF. Not only did Osisko strike gold, but the deposits could enrich the firm more than outsiders imagine.
Safety Rating: 6/10
Bally’s Corp (BALY)
I usually associate Bally’s (NYSE:BALY) with old slot machines and even older customers. But this aging gaming company found several new fans last Friday:
- CEO. Bought $258,700
- CFO. Bought $246,500
- Other C-Level Executives. Bought $360,400
- Director. Bought $45,000
The reason for the buying frenzy soon became clear. This Monday, the New York State Gaming Commission approved nine betting operators to accept bets via mobile. And among those names: Bally’s.
The stock, of course, immediately jumped 4% on the news. But given Bally’s mobile ambitions, the New York award is far more important than most outsiders realize.
Last November, the legacy gaming firm acquired sportsbook platform Bet.Works. The company would follow up with a $3 billion purchase of Gamesys, which specializes in gaming software development.
Bally’s online revenues now stand at $11 million, an 83% increase over the prior quarter. And the green light from New York gives Bally’s the sizable market it needs to develop its products.
Management seems confident that momentum will sustain. If they’re right, BALY will become the top contender to beat DraftKings (NASDAQ:DKNG) and FanDuel at their own game.
Safety Rating: 8/10
TRACON Pharmaceuticals (TCON)
When it comes to small-cap biotech firms, I look for companies with proven winners in their pipeline.
Perhaps it’s success in other trials… or a proven biological pathway… anything to keep us from buying a total zero.
TRACON (NASDAQ:TCON) takes “proven” to another level, and insider buying is just the tip of the iceberg:
- CEO. Bought $23,000
- CFO. Bought $3,700
- Directors. Bought $50,000
That’s because the startup’s key drug — ENVARSARC — has already passed phase-3 trials in China. The key ingredient, Envafolimab, is licensed from Hong Kong-based Alphamab Oncology.
Of course, that doesn’t mean that American regulators will approve ENVARSARC. The FDA has rebuffed other Chinese-approved drugs before, including Sinovac’s Covid-19 vaccine CoronaVac.
But given TRACON’s low $3.40 per-share value, it’s a bet insiders have been willing to make.
Safety Rating: 5/10
I know, I know… medical device companies are notoriously hard to get off the ground. For every DexCom (NASDAQ:DXCM) that succeeds, dozens more end up going nowhere. That’s why you’ll seldom see these companies featured on Moonshot.
Medicare reimbursements can quickly make devices absurdly expensive for hospitals. In many instances, CMS will pay only a marginal cost factor for the device itself, “50 percent of the cost of the new device or technology, or 50 percent of the overall incremental costs associated with the new technology.” And wherever Medicare goes, private insurers tend to follow.
And that’s why a $10,000 purchase of electroCore (NASDAQ:ECOR) by CFO Brian Posner last week caught the attention of the Insider Track strategy. Studies have shown that CFO buying outperforms purchases by all other C-level executives, including CEOs.
So why would ECOR’s CFO buy shares in a firm that’s spent $80 million in marketing to achieve just $4 million in annual sales?
Much like executives at Osisko Mining, Mr. Poster likely knows something we don’t. And in the case of medical device companies, there are two possible explanations.
- Upcoming Contract. The sales team is on the verge of landing a major contract.
- M&A. Executives are considering a corporate sale to a more established healthcare firm.
Of course, this is all speculative (and your position size should reflect that fact). ECOR’s gammaCore is a provenly good product for treating migraines with a provenly bad sales record. But with the CFO tip-toeing into the sub-$1 stock, there’s plenty of reason to consider following his footsteps into electroCore stock.
Safety Rating: 4/10
Alphatec Holdings (ATEC)
Finally, the Insider Track strategy identified spinal surgery company Alphatec Holdings (NASDAQ:ATEC) as a company to watch.
On Wednesday, 10% owner David Pelizzon spent another $70,000 buying up ATEC shares, bringing total insider purchases to $3 million in the past quarter.
At first glance, buying appears motivated by the company’s growing business. Despite a questionable medical imaging acquisition earlier in the year, Alphatec still produces some of the best equipment in the spinal surgery industry. Revenues have increased 50% over 2020.
“Despite our many successes to date, we know we are still only getting started,” reported CEO Pat Miles in the Q3 earnings call.
But there’s also a technical reason why two directors and the CEO might have bought so many shares: an unusually high level of short interest that has little to do with the company itself.
In August, Alphatec issued $250 million of convertible notes to fund its growth — a typical strategy for biotechs to reduce borrowing costs. But in order to limit potential share dilution, ATEC also entered into several capped call transactions to raise the conversion price to $27.68.
That move created an unintended consequence: by pushing these bonds deeply out-of-the-money, management accidentally made the ATEC a target for convertible bond arbitrageurs.
“These convertibles have very little sensitivity (i.e., low delta) to changes in the underlying share price,” explains hedge fund database Eurekahedge, “and are often mispriced because other hedge funds might have sold the convertibles regardless of credit fundamentals.”
To hedge their convertible bond positions, arbitrageurs have sent ATEC’s short interest to 10.3% of its float — more than three times higher than the median medical equipment company, according to Thomson Reuters.
As the abnormal selling pressure unwinds, ATEC’s stock should surge higher.
Safety Rating: 6/10
The Risks of Investing
Last week, I published 5 Stocks Set to 10x Next Year.
Your responses were phenomenal. Many readers were taken aback by the truth of how hard it is to find and choose 10x stocks.
Still, I want to emphasize one key fact:
Not only can you lose money with Moonshots. You will.
Now, before you burn my house down too, consider every penny stock I recommended between late August through September.
On average, this penny stock portfolio has performed marvelously — earning 7x more than the S&P 500 index.
But when you dive into individual performance, you’ll quickly see the risks of penny stock investing. Some like Asia Broadband and POSaBIT have seen stunning returns in a matter of weeks. Others like GCI and TLSS have dropped like rocks in a swampy river.
So let me make it abundantly clear: never speculate any more money than you can afford to lose. And no matter how tempting a single investment might seem, it’s never worth sacrificing smart diversification in the pursuit of gains.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.