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Famed money manager Peter Lynch gave us the inside scoop on how to look at insider transactions. Executives can sell their stock for any reason, he said, but they only buy for one: They think the price is going to go up!
Below we highlight a handful of insiders who are making big purchases of their own company's stock in the last week. These aren't executives getting big chunks of shares from option grants. Rather, they're insiders putting their own money on the line buying shares at market prices. We'll then pair that information with insights from the members of Motley Fool CAPS to see if they think the stock has the same prospects the insiders do.
Market Value of Transactions
CAPS Rating (out of 5)
|Cabela's (NYSE: CAB )||Reuben Mark, director||
|Chesapeake Energy (NYSE: CHK )||Aubrey McClendon, CEO||
|Star Scientific (Nasdaq: CIGX )||Jonnie Williams, CEO||
Sources: wsj.com; Motley Fool CAPS.
Although following the lead of insiders can be profitable, we still recommend you do further due diligence to determine whether these stocks make a good addition to your own portfolio. So this isn't a list of stocks to buy, but just the inside track on companies you might want to check out further.
Right on the mark
Sporting goods retailer Cabela's enjoyed a brief run up recently after reporting better than expected fourth quarter earnings. Same store sales showed healthy 7% growth over the year-ago period, and it said it expected to beat analyst expectations for 2011. With Hibbett Sports reporting strong profit growth and Dick's Sporting Goods (NYSE: DKS ) also seeing sales surge, the outdoors are once again a place that people apparently want to be.
Analysts, though, are less than impressed with Cabela's, noting that much of its earnings gains came as a result of a reduction in bad loan reserves from its financial services segment. With the stock having doubled over the prior year at the time, Wall Street felt the sporting goods retailer was more than fairly valued. Since then the stock has peeled back 23% from its highs.
Yet unlike some financial services firms that reduced their loan loss reserves even as delinquencies continued to rise, suggesting they were merely managing and massaging their earnings, Cabela's delinquencies have fallen and the creditworthiness of its credit card holders has improved. Undoubtedly, Reuben Mark, who's been scooping up shares regularly this month, is expecting the better results going forward.
With 90% of the more than 700 CAPS members that have rated the retailer expecting it to beat the market averages, it's obvious they believe its stock is going to hit the bull's-eye. Let us know on the Cabela's CAPS page whether future earnings will be another trophy it will mount on the wall.
Profiting at the margins
Let's hope Chesapeake Energy CEO Aubrey McClendon doesn't overextend himself again by borrowing to buy up the natural gas leader's stock and end up getting stuck with a margin call again. Yet with three other directors also joining in this month purchasing shares, at least he's not alone in his belief Chesapeake is on a comeback.
With the future of nuclear power suddenly on the table, natural gas is looking all the better as an alternative again. Not only has Chesapeake's stock risen 56% over the past six months, ATP Oil & Gas (Nasdaq: ATPG ) is up 50% and Devon Energy (NYSE: DVN ) is up 46%. In fact the whole CAPS Natural Gas sector is 25% higher than it was a year ago.
CAPS member meadornack says we can expect natural gas and Chesapeake Energy to only climb further from here.
This stock got went down with the rest of the energy sector after the problems in Japan w/ nuclear power. Natural gas demand will only increase from here – especially now that nuclear power has yet another black eye in the making. With a forward P/E of 11.22, [Chesapeake] looks good!
Keep an eye on how the natural gas leader gasses up by adding it to your watchlist.
A transforming event
A bit of nice timing for the CEO of "healthy tobacco" maker Star Scientific who bought his shares for an average of $1.97 each, only to have the U.S. Patent Office rule in favor of his company's patents a week later, which will help it in its legal battle against Reynolds American (NYSE: RAI ) . The stock has nearly doubled in value.
However, highly rated All-Star CAPS member EnigmaDude thinks the risk-reward ratio is tilted against Star: "Definitely more potential for it to go down from here as opposed to going much higher."
On the inside track
Following the insiders can be a path to profits, but it pays to start your own research on these stocks on Motley Fool CAPS. Read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page. Sign up today for the completely free service, and tell us whether its worth trading on this inside information.