Can This Stock Go Higher?

Is Jazz Pharmaceuticals (NYSE: JAZZ  ) headed higher, or lower? That's the question we ask when we evaluate insider buying and selling. We ask because how executives spend their paychecks is often a reflection of what they think of their companies' prospects.

Of course, not all buys are equal. According to two decades' worth of research from Dr. H. Nejat Seyhun compiled in his book Investment Intelligence From Insider Trading, buying is most predictive when it (a) comes from the CEO or other top-level executive, and (b) it's performed in bulk. Seyhun found buys of between 10,000 and 100,000 shares to be most informative.

How do Jazz's managers measure up against Seyhun's benchmarks over the past year? See for yourself:

Insider Rating

Bearish. Open market purchases took place months go, at much lower prices. Sales near recent highs.

Business Description

A pharmaceutical company that develops drugs for treating psychological and neurological disorders.

Recent Price

$11.44

CAPS Stars (out of 5)

*

Percentage of Shares Owned by Insiders

3.04%

Net Buying (Selling)*

$738,558

Last Buyer (% Increase)

Alan Sebulsky, Director
9,788 shares at $6.84 apiece on Nov. 13, 2009
(Purchase bolstered direct holdings by 188%.)

Last Seller (% Decrease)

Robert Myers, President
4,631 shares at $11.36 apiece on March 9, 2010
(Sale represented 3% of direct holdings.)

Competitors

Cephalon (Nasdaq: CEPH  )
Endo Pharmaceuticals (Nasdaq: ENDP  )
GlaxoSmithKline (NYSE: GSK  )
Pfizer (NYSE: PFE  )

Partners

Elan (NYSE: ELN  )
Valeant Pharmaceuticals (NYSE: VRX  )

Recent Foolish Coverage of Jazz Pharmaceuticals and Competitors

A 1-in-100 Investor
5 Stocks That Laugh at Wall Street
Wall Street's Buy List

Sources: Form 4 Oracle, Capital IQ (a division of Standard & Poor's), and Motley Fool CAPS. Data current as of March 30.
*Open market sales and purchases only.

What we're tracking here, and why
Insider buying data can be confusing. Here, I'm concentrating only on buying and selling conducted in the open market. With most of these transactions, insiders control the timing. Other times they're buying or selling under the purview of a 10b5-1 plan. Either way, personal holdings are being bought and sold.

Those personal holdings matter the most -- they're the shares executives hold for investment, rather than compensation. Employee stock options are different; they're compensatory in the purest sense. I've stripped out options-related buying and selling from the calculations you see above.

The Foolish view: bearish
Jazz Pharmaceuticals is the sort of stock I wish I could buy. And I would, if insiders weren't selling.

The timing matters more than the volume here. One week after Jazz reported expectations-busting revenue and earnings, after the stock had taken off, executives began cashing in. On March 9, General Counsel Carol Gamble sold 14,467 shares for around $11.40 apiece, equal to 44% of her direct holdings. Perhaps it's me, but that looks a lot like profit taking.

I've no beef with taking profits. All investors cash in from time to time. I'm just loath to buy when those in the know sell into a buying spree, especially when there's a history of buying at lower levels, as there is here:

  • Board member Alan Sebulsky bought 9,788 shares at $6.84 share in November, collecting a 67% gain in less than six months.
  • In September, board member Patrick Enright bought 144,000 shares at around $7.22 a share. He's sitting on a 58% gain.

But these bets were easy. All-Star investor TSIF bet on Jazz Pharmaceuticals in June, after the stock had taken a thorough beating. "The pullback to the low $3's in my opinion is a gift," this one-time top Fool wrote when the stock traded for $3.13 per share. "Yes drug stocks are highly volatile. Funding, results, approvals, all cause gyrations."

Now, insiders are taking some of money off the table, and I don't blame them. Do you agree? Disagree? Log into Motley Fool CAPS today, and tell us how you would rate Jazz Pharmaceuticals.

And if you want me to take a Foolish peek at the insider action of your favorite stock, email me here or use the comments box below. I'll write this column as often as you, our readers, demand.

Elan is a Motley Fool Rule Breakers recommendation. Pfizer is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the market-beating Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out his portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool owns shares of GlaxoSmithKline and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy has its eye on you.


Read/Post Comments (3) | Recommend This Article (6)

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.

  • Report this Comment On April 05, 2010, at 1:30 PM, egobasher wrote:

    I watch the insider buying and selling closely. The difference is that insider selling should be ignored at such small amounts. They may want to buy a house, have debts to retire, put their child through college, ect. The buying however is more important. This is hard earned money that the insider is risking. The insider buying still out ways the selling in JAZZ. Therefore I gave it a thumbs up today. It is at a good support zone at 11.25 and the risk is $.75 on the down side using a stop at 10.5 and upside target is 13 (2.75 points).

  • Report this Comment On April 05, 2010, at 1:31 PM, egobasher wrote:

    I watch the insider buying and selling closely. The difference is that insider selling should be ignored at such small amounts. They may want to buy a house, have debts to retire, put their child through college, ect. The buying however is more important. This is hard earned money that the insider is risking. The insider buying still out ways the selling in JAZZ. Therefore I gave it a thumbs up today. It is at a good support zone at 11.25 and the risk is $.75 on the down side using a stop at 10.5 and upside target is 13 (2.75 points).

  • Report this Comment On April 05, 2010, at 3:25 PM, egobasher wrote:

    I meant 14 upside target (2.75 points).

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