Who's Buying Now?

It's time once again to check out the most interesting insider purchases from the past seven days. After reading through numerous filings using insider tracking tool Form 4 Oracle, here are my top five:

The week's buying

Company

Closing Price 2/14/06

Total Value of Stock Purchased

52-Week Change

Boston Scientific (NYSE: BSX  )

$22.03

$331,700

(33%)

Fossil (Nasdaq: FOSL  )

$18.18

$1,266,763

(35%)

Franklin Bank (Nasdaq: FBTX  )

$16.91

$508,538

(0.1%)

Gartner (NYSE: IT  )

$13.58

$796,440

44%

iPass (Nasdaq: IPAS  )

$7.83

$1,404,175

20%

Sources: Fool.com, Yahoo! Finance, Form 4 Oracle, SEC filings.

Boston on sale?
First up this week is Boston Scientific, which snatchedGuidant (NYSE: GDT  ) from the eager jaws of Johnson & Johnson after a protracted bidding war. I wouldn't typically be interested in this company because I'm not much for medical devices or biotech of any kind, and it's a large cap without a dividend. Yuck.

Nevertheless, the level of insider buying has caught my attention. Last week, board member and private investor N.J. Nicholas Jr. spent more than $300,000 for shares. According to the footnotes, the purchases are for his retirement account and a charitable trust run by him and his wife.

I take Nicholas' buying seriously because records suggest he's a very successful investor. For example, two years ago, he sold all 120,000 of the Boston Scientific shares he held in his IRA at roughly $42 per stub. Today, the stock trades for a shade above $22. And that's not all. Securities and Exchange Commission filings show that in 2003, he sold part of his position in Priceline (Nasdaq: PCLN  ) for roughly 10% more than the shares are worth today. And he routinely picked up stock in Xerox on the cheap. (Nicholas also sits on the boards of Xerox and Time Warner's cable group.)

So, what does he see in Boston Scientific now? My guess is that he believes that concerns over the firm's ability to fix Guidant are overblown. If true, then Boston Scientific is, indeed, very cheap compared with its peers:

Metric

Boston Scientific

J&J

Medtronic

Gross Margin

74.3%

72.4%

75.3%

Operating
Margin

32.8%

26.5%

33.6%

Return
on Equity

15.1%

N/A

17.8%

Forward P/E

12.68

15.58

25.14

PEG

1.04

1.44

1.64

*Data provided by Capital IQ, a division of Standard & Poor's. All data is on a trailing-12-month basis, per market close 2/14/04.

Not bad, eh? Boston Scientific sports the lowest forward price-to-earnings ratio and is cheapest on a PEG basis, which measures expected earnings versus expected growth. Those are interesting indicators, to be sure. Yet neither can replace the block-and-tackle usefulness of a discounted cash flow analysis, in which you'd more precisely measure the huge risks facing Boston Scientific. How huge, you ask? Well, the Food and Drug Administration has demanded changes in the way the company operates, and Moody's has cut its debt rating -- a move that might act to imperil the success (or lack thereof) of a Guidant merger.

In spite of all that, Nicholas sees something in Boston Scientific, and he was right the last time he dealt in the shares. I'd like to believe he's right this time as well, but my gut just won't let me. Invest at your own risk.

When insider buying makes little sense
It's almost the same story with Fossil. The watchmaker has been profiled in these digital pages before, but the buying hasn't stopped. Just last week, CEO Kosta Kartsotis bought another 70,000 shares.

Frankly, this is mystifying. The company's poor results don't justify the purchases. For example, on Feb. 2, Fossil told analysts that Q4 earnings per share were expected to come in at least 35% lower than previously expected. And sales were forecast to climb just 2% year over year.

Not surprisingly, a reader who had recently bought shares asked me what Kartsotis could be thinking. I'm afraid my answer wasn't very reassuring. I said that it must be one of three things:

  • He believes a turnaround in earnings prospects is inevitable.
  • He's looking to take the company private (which is unlikely, since he and his brother own only 30% of the company at this stage).
  • He's insane.

The real answer is probably "none of the above." And that means it's time to learn a lesson: Insider buying can be a very bullish indicator, but it isn't always. It certainly can't be a substitute for digging through financial statements. Doing so here would have shown that Fossil's inventory was growing faster than sales in Q3. The stock is down a healthy margin since. Ouch.

That's all for this week. See you back here next week, when we dig through more insider deals in search of the next home run stock.

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Fool contributorTim Beyersusually favors two scoops of ice cream over the inside scoop. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.


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