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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.|
|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.