Famed money manager Peter Lynch told us executives can sell their stock for any reason, but typically buy for only one: They think the price is going to go up!
Today, I've highlighted two insiders who've recently made big purchases of their own company's stock. These aren't option grants but rather are insiders putting their own money on the line, buying shares at market prices just like you and me.
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.
Netflix (NAS: NFLX)
Jay Hoag, director
Valeant Pharmaceuticals (NYS: VRX)
ValueAct Holdings, director
Source: company filings.
Although following the lead of insiders can be profitable, we still recommend you do further due diligence to determine whether these stocks belong in your portfolio. This isn't a list of stocks to sell or buy, just the inside track on companies you might want to check out further.
A big vote of confidence
One doesn't spend a million dollars on a whim, let alone $14 million, but does the large slug of stock Netflix director Jay Hoag bought reflect a real belief in the video king's future or does it amount to whistling past the graveyard?
No doubt its stock got a nice boost when the purchase was announced, but in the face of slowing subscriber growth as competition grows, it's not really an academic question. Comcast, Amazon.com (NAS: AMZN) , and Verizon (NYS: VZ) all are getting into the act, and considering the heft they bring where it counts -- deep pockets -- they can't be lightly dismissed.
Yet there is the fact that a second director bought a half-million-dollar tranche, too, so one could make the argument that while Wall Street is predicting a difficult future, those more intimately familiar with Netflix's operation are making some big purchases and in the process exhibiting a not-so-quiet confidence.
While hope springs eternal that Netflix will get bought out -- even highly rated CAPS All-Star TheMiracleDJRleans in this direction -- the insider purchases would seem to negate that possibility since the SEC tends to look askance at such trading when there's material news waiting in the wings.
Of course, companies can always fall further (right on down to zero), but I tend to agree that Netflix, with its stock so beaten up, looks attractive at these levels. I'm rating it to outperform the market on CAPS and think its stock will do well going forward, either as a stand-alone company or after having been picked up in an acquisition. Add Netflix to your watchlist to keep track of the transitions, then let us know on the Netflix CAPS page why you think the insiders are so confident.
No rest for the weary
Eschewing a strategy of organic growth in favor of growth by acquisition, Valeant Pharmaceuticals was able to beat analyst expectations on the top and bottom lines this past quarter, but such policies are fraught with risk. Product sales jumped 54% to $768 million, but only 11% of that was from existing product lines, the rest coming from acquisitions. It also reported a loss after having to sell some lines as required to be able to buy others.
CAPS member TMFRazorback actually likes Valeant's game plan, noting that the pharma buys busted companies, fixes them up, and then sells them off at a higher price: "It's a wonderful formula that is working extremely well for them. They mention in their annual letter that all assets are available for sale at all times at the right price."
Yet some cracks might be appearing in the foundation as analysts are now questioning whether the increased guidance the company offered was really as robust as suggested. I've never been a fan of buying more, more, more to grow the business, and while it has a global business and little to worry about in the area of patents, I fear the constant buy-and-sell game it's playing will catch up to it eventually. So many moving parts all the time makes it a difficult business to handicap, and the growth game is good until it no longer is.
Not every buy goes as planned. ISTA Pharmaceuticals (NAS: ISTA) , for example, rejected its overtures and the big premium offered. Valeant went and bought a different eye-care company instead. ISTA ended up agreeing to be bought out by Bausch & Lomb for an even bigger premium. I'm rating the pharma to underperform on CAPS.
Although it's not often you see a company listed as a director, as ValueAct Holdings is, G. Mason Morfit serves on the management board of ValueAct and also as a director of Valeant, so under SEC rules the entity can be considered a director. Thus the purchase may mean less than meets the eye. Add Valeant to the Fool's free portfolio tracker then let us know on the Valeant Pharmaceuticals CAPS page if you buy into its acquisition strategy.
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 Netflix and Amazon.com.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com and Netflix. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.