Famed money manager Peter Lynch gave us the inside scoop on how to look at insider transactions. Executives can sell their stock for any reason, he said, but they only buy for one: They think the price is going to go up!
Today, I've highlighted two insiders who have made big purchases of their own company's stock in the past week. These aren't executives getting big chunks of shares from option grants. Rather, they're insiders putting their own money on the line, buying shares at market prices. I then paired that information with insights from the members of Motley Fool CAPS to see if they think the stock has the same prospects the insiders do.
Market Value of Transactions
CAPS Rating(out of 5)
Valence Technology (NAS: VLNC)
Carl Berg, director
Sears Holdings (NAS: SHLD)
Edward Lampert, director
Although following the lead of insiders can be profitable, we still recommend you do further due diligence to determine whether these stocks ought to be sold from your own portfolio -- or would make a good addition! So this isn't a list of stocks to sell or buy, but just the inside track on companies you might want to check out further.
You can bank on it
Lithium-ion battery maker A123 Systems (NAS: AONE) got a lot of mileage out of touting an agreement with General Motors (NYS: GM) to produce "tens of thousands" of batteries for electric vehicles. I've pointed out on several occasions my belief that demand doesn't yet exist for these vehicles in sufficient quantities, even with government subsidies of both manufacturers and buyers. But Valence Technology is different.
It, too, makes EV batteries, and has contracts with Smith Electric Vehicles, which is selling its output to companies like PepsiCo, Staples, and even Segway. While Smith hedged its bets by handing off some demand to A123, Valence is much closer to profitability than its rival. It won't take nearly as much to put it in the black as it will A123, which needs to hope GM can somehow generate demand for its Cruze, let alone the overhyped Volt.
Unlike the game of horseshoes, however, close isn't close enough for CAPS All-Stars, who've overwhelmingly indicated their belief that Valence won't be able to outperform the market. I joined the chorus of negativity last month, giving the battery maker the thumbs-down, but add it to your watchlist and then drive over to the Valence Technology CAPS page to tell us if you agree that the stock will be drained or think that it will soon show some spark of life.
As a longtime critic of Eddie Lampert's stewardship of Sears Holdings, it probably won't come as much of a surprise to hear me say I think he's throwing good money after bad. A lot of good money. Not only did Lampert buy over $3 million worth of stock last week, he purchased over $270 million the week before that! Whatever else one might say about the hedge fund operator, you have to respect his willingness to put his money on the line.
My problem is that it's too little, too late. When rival Wal-Mart (NYS: WMT) was revamping its stores and refreshing its aisles, Lampert eschewed the practice in lieu of using fancy financial footwork like credit swaps to try to make a profit. When that failed, he engaged in big share buybacks. Money invested prudently back then might have made the vast real estate wealth Sears holds a really profitable return.
Investors might have cheered when Lampert sunk that huge chunk of change into the stock, but it would have been prudent to deploy cash when it could have made a difference. Today, Sears is an empty shell of its former self as sales dwindle and profits have turned to widening losses. It's paid the price of neglect as even its once vaunted cash hoard of billions is down to a more pedestrian $624 million.
I've had an underperform rating on Sears for years, and sadly, it's played out as I foresaw. And though two-thirds of those rating the retailer think it will be able to beat the Street, the lowly one-star CAPS rating the investment community has assigned it belies their belief that there are better places today for your money. As pchop123 says, even rumors of a takeover are only a temporary salve to this festering wound: "The rumor of a takeover might be true, but it resulted in just a substantial amount of short covering. Sears is still losing substantail monies and taking some drastic actions which will not benefit the stock price."
Add Sears Holdings to your watchlist and let us know in the comments section below if you think it's only a matter of time before Sears follows Kodak into the history books as once-iconic companies doomed for the dustbin of history.
On the inside track
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At the time thisarticle was published Fool contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of Staples, Wal-Mart, and PepsiCo.Motley Fool newsletter serviceshave recommended buying shares of Staples, PepsiCo, Wal-Mart, and General Motors, as well as creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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