Who's Buying Now?

It's time once again to check the most interesting insider purchases of the week. After reading through numerous filings using insider tracking tool Form 4 Oracle, here are my top five today.

The week's buying

Company

Closing Price 3/12/08

Total Value Purchased

52-Week Change

Fuel Tech (NASDAQ:FTEK)

$16.93

$799,303

(35.4%)

Granite Construction (NYSE:GVA)

$29.99

$994,822

(47%)

Macy's (NYSE:M)

$23.20

$127,711

(47.5%)

Mylan Laboratories (NYSE:MYL)

$10.50

$735,100

(47%)

United Natural Foods (NASDAQ:UNFI)

$16.44

$508,329

(45.3%)

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

Please stop quoting Peter Lynch
I'm going to take a risk today. I'm going to refute Peter Lynch. Or, at least, the common reference to Lynch when it comes to insider buying, which says that insiders sell for all sorts of reasons but they buy for only one -- because they believe the stock is cheap.

There's admirable insight in that paraphrasing. What I despise is the logical fallacy it creates, which goes something like this:

  • Insiders think the stock is cheap.
  • Insiders know the business better than I do.
  • The stock must be cheap.
  • I must buy, too.

Insider buying is never, ever a perfect indicator. Witness IndyMac Bancorp (NYSE: IMB  ) and Luminent Mortgage Capital. Executives at both firms put significant wealth on the line and lost. They were small-f fooled, as I was when last year I wrote about how Luminent looked cheap.

But, of course, it wasn't. Context mattered. What I didn't know with Luminent and IndyMac is how much lying went into the so-called "liar loans" these firms were backing. Insiders, apparently, didn't know, either.

Here's my point. When assessing the importance of insider buying, look at the questions that exist about the business you're analyzing. How might the buying you're witnessing answer those questions?

Time for a dose of Mylan?
Let's run through an example. This week's top pick, generic drug producer Mylan Labs, faces two big questions from investors:

  • Can it successfully integrate and draw value from recent acquisitions?
  • Can management handle the debt it assumed to fund those deals?

Foolish colleague Brian Orelli argues that it's possible. Quoting from his recent take on the company:

Mylan's new larger size should help it compete against the two big guns in generic drugs: Teva Pharmaceutical (Nasdaq: TEVA  ) and Novartis. If it can trim the fat, Mylan should make for a good long-term investment.

Notice that his argument doesn't hinge on insider buying. (Though it could: Five different insiders, including four C-level executives, have bought shares in the last week.)

What he's saying is that, by acquiring measurable scale, Mylan has given itself the resources to compete against well-heeled peers. If evidence of fiscal discipline follows, higher returns should as well.

Thus, with Mylan, insider buying is but one data point in the process of analyzing its worth as an investment. My argument for Luminent was a lot thinner and closer to the logical fallacy I lampooned at the open.

Interestingly, our 86,000-strong Motley Fool CAPS community seems to know the difference. Whereas Luminent earned just two stars at the time of my write-up, Mylan gets four today:

Metric

Mylan Labs

CAPS stars (5 max)

****

Total ratings

312

Bullish ratings

291

Percent Bulls

93.3%

Bearish ratings

21

Percent Bears

6.7%

Bullish pitches

54

Bearish pitches

6

Note: Data current as of March 12, 2008.

Color me intrigued. I'll be adding Mylan to my CAPS watch list today.

There's your update. See you back here next week, when we dig through more insider filings in search of the next home run stock.

Get the inside scoop on stocks of all sizes with related Foolishness:


Read/Post Comments (0) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 597605, ~/Articles/ArticleHandler.aspx, 11/22/2014 8:31:15 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement