The Rally's Just Beginning for This Asset Manager

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:

Insider Rating

Bullish

Recent buy prices above earlier sale prices

Business Description A business development company that provides capital for financings and buyouts
Recent Price $6.27
CAPS Stars (out of 5) ****
Percentage of Shares Owned by Insiders 1.99%
Net Buying (selling)* $70,557
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%)

Competitors

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.

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.

For further Foolishness featuring American Capital:

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Apollo Investment at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy has its eye on you.


Read/Post Comments (2) | Recommend This Article (10)

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 October 18, 2010, at 6:49 PM, valuefrog wrote:

    Valuefrog here. I am still long 45,000 ACAS shares in my personal portfolio. Average purchase price of $4.92.

    It'll get to $10 at some point in the next year, which is a conservative estimate of where NAV should be (NAV is currently at $9 and change).

    I had previously held ACAS starting in 2005 but got out at a 20% profit in 2007.

  • Report this Comment On November 03, 2010, at 8:19 PM, 1caflash wrote:

    ACAS should do Fine. I'm a bit more conservative, so I try to make sure when I invest, I don't have to guess about the Dividend. Valuefrog seems to have a winner. My money is in Ares Capital. I believe both Companies are Undervalued, and I look forward to a Positive Earnings Report November 4th from ARCC.

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