Bet on This Investor Before the Discount's Gone

Is Prospect Capital (Nasdaq: PSEC  ) 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 Prospect Capital's managers measure up against Seyhun's benchmarks over the past year? See for yourself:

Insider Rating Bullish, but not as great as it might appear. Insiders are merely continuing a long-standing pattern of buying.
Business Description Investment firm. Provides debt and equity financing to growing mid-size business in exchange for an ownership stake.
Recent Price $9.84
CAPS Rating (out of 5) ****
Percentage of Shares Owned by Insiders 1.50%
Net Buying (Selling)* $4.1 million
Last Buyer (% Increase) John Barry, Chief Executive Officer
105,391 shares at $9.59 apiece on Sept. 3, 2010
(Increased direct holdings by 10%.)
Last Seller (% Decrease) No sales over the past 12 months.
Competitors Gladstone Capital (Nasdaq: GLAD  )
MVC Capital (NYSE: MVC  )
NGP Capital Resources (Nasdaq: NGPC  )

Sources: Form 4 Oracle, Capital IQ, and Motley Fool CAPS. Data current as of Nov. 29.
*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
For as much talk as there's been here about the dangers of buying high-yielding dividend stocks, our family portfolio has enjoyed a healthy return in Prospect Capital precisely because of its double-digit yield.

Reinvesting those payouts over two and a half years has dropped our effective cost basis from $12.29 to $9.04 a share. We're yielding 13.4% annually on our original purchase, a full percentage point higher than the reported yield.

We're not the only ones reinvesting. CEO John Barry is plowing his dividends back into greater holdings, even as he buys shares on the open market. Between July and August alone, his dividends purchased more than 21,000 additional shares. He bought 11,000 more on the open market in early September.

Net Asset Value (NAV) makes these purchases important. Prospect Capital had $10.24 in NAV per share as of the close of the third quarter on Sept. 30, yet the stock was trading for less than $10 a share as of this writing.

That's unreasonable. Unless NAV begins a sharp decline, Barry is investing with known upside. Prospect's stock will have to rise to meet or even slightly exceed NAV at some point, especially with investment income rising 29.4%, 54.6%, and 63.7% year-over-year in each of the last three quarters.

"Company is beginning to see an increase on its investment returns and consistently pays $0.10 [per] share dividend monthly. [Prospect Capital] is primarily involved in senior and senior secured debt, which should provide some added safety to this investment," wrote Foolish investor BUbulldog in September.

Do you agree? Disagree? Log into Motley Fool CAPS today and tell us how you would rate Prospect 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, reply to me on Twitter, or use the comments box below. I'll write this column as often as you, our readers, demand.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of Prospect Capital 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. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy has its eye on you.


Read/Post Comments (2) | Recommend This Article (8)

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 December 01, 2010, at 7:40 PM, PacificSunwear wrote:

    Nice call on PSUN. Now up 60% from your short call.

    What were the other stocks in that article?

    By the way, for full disclosure---who is you direct report at MF. He needs to be aware of your hidden "performance".

    Tim's selective portfolio.

  • Report this Comment On December 01, 2010, at 10:36 PM, TMFMileHigh wrote:

    @PacificSunwear,

    >>By the way, for full disclosure---who is you direct report at MF. He needs to be aware of your hidden "performance".

    Sure, click the "email" link above and your comments will go directly to the editor.

    >>Nice call on PSUN. Now up 60% from your short call.

    Good for you.

    >>Tim's selective portfolio.

    Not that your criticism is valid since my holdings and picks are all out in the open, but it's funny to see this from someone with no CAPS portfolio or verified holdings. No record of any kind, really. Why not get in the game so we can see your work?

    Anyway, here again is the link to all my holdings:

    http://my.fool.com/profile/TMFMileHigh/info.aspx

    And here is my CAPS portfolio, where the vast majority of my article picks are represented:

    http://caps.fool.com/TMFMileHigh.aspx

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

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