Is American Capital (Nasdaq: ACAS ) 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 American Capital's managers measure up against Seyhun's benchmarks over the past year? See for yourself:
Recent buy prices above earlier sale prices
||A business development company that provides capital for financings and buyouts
|CAPS Stars (out of 5)
|Percentage of Shares Owned by Insiders
|Net Buying (selling)*
|Last Buyer (% increase)
Malon Wilkus, Chairman and CEO
1,700 shares at $5.88 apiece on Sept. 14, 2010
(Increased direct holdings by less than 1%)
|Last Seller (% decrease)
Brian Graff, senior managing director
5,184 shares at $5.27 apiece on July 28, 2010
(Reduced direct holdings by less than 1%)
Ares Capital Corp. (Nasdaq: ARCC )
Fortress Investment Group (NYSE: FIG )
MCG Capital Corp. (Nasdaq: MCGC )
Sources Form 4 Oracle, Capital IQ, and Motley Fool CAPS. (Data current as of Oct. 14.)
*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: bullish
Allow me to admit a bias before we dig further: I'm a former shareholder of American Capital. Like most who've owned the stock anytime during the past three years, I took a loss. So as you might expect, I approached this analysis with skepticism.
Having said that, today's American Capital shows signs of significant improvement. Management has produced a 26.1% return on equity over the trailing 12 months. Book value is on the rise once more. And according to research from LSV Asset Management, the stock has one of the best earnings yields available.
Fools also see a bargain at present levels. "[American Capital] has strong operating income but suffered a liquidity crisis in 2008. Debt issues have now been resolved, and leverage paid down. Additionally, John Paulson bought 13.5% of the company, providing a vote of confidence. I expect [American Capital's] stock price to return to NAV, just like Ares Capital and Apollo Investment (Nasdaq: AINV ) have," All-Star investor valuefrog wrote in August.
Insiders would seem to agree. Four separate managers and board members have bought shares since June. Sellers have been equally varied, but what sales have been made have been relatively small. By contrast, board member Philip Harper bought 40,000 shares in August. He's enjoyed a 22% gain since. I think he'll see even greater returns in the years ahead.
Do you agree? Disagree? Log into Motley Fool CAPS today and tell us how you would rate American Capital. You can also add the stock to your watchlist.
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