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.
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Stock
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Insider, Position
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Market Value of Transactions
|
CAPS Rating (out of 5)
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| ChinaCast Education (Nasdaq: CAST ) |
Ned Sherwood, director
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$6.3 million
|
***
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| Felcor Lodging Trust (NYSE: FCH ) |
Richard Smith, CEO
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$1.1 million
|
*
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| Sun Bancorp (Nasdaq: SNBC ) |
Wilbur Ross, 10% owner
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$17.6 million
|
*****
|
Source: 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
$6 million is a lot of money for an individual to put up to cover up a smoke-and-mirrors operation, yet if you listen to critics of Chinese secondary education provider ChinaCast Education, that's exactly what director Ned Sherwood is doing. The company has suggested the educator's problems are simply the work of short-sellers trying to profit at the company's expense, and Sherwood's $6 million purchase is undoubtedly a vote of confidence in the company.
Here in the U.S., for-profit education companies Apollo Group (Nasdaq: APOL ) , Corinthian Colleges (Nasdaq: COCO ) are under the gun because of the Obama administration's animus against their perceived inability to help enough students graduate and find relevant work. As abhorrent as the attack of the for-profit schools is, they're not being accused of fraud and self-dealing.
In China, however, China Education Alliance has been sunk by similar charges, though it may not be industry wide. New Oriental Education & Technology (NYSE: EDU ) has so far escaped the taint of fraud.
Analysts at OLP Global, however, say there is a lot of questionable activity buried in the financial statements of ChinaCast, and despite Deloitte Touche and PriceWaterhouseCoopers poring over the books it is waving red flags. Of course, material weaknesses in ChinaCast's financials have been identified for three years running.
Highly rated CAPS All-Star TMFCandyMountain points to these allegations in marking ChinaCast to underperform going forward, but toshimelonhead prefers to look at the large potential the industry proffers:
At this point, only 5 percent of Chinese have a postgraduate degree compared to 28 percent of Americans. ChinaCast also provides distance education for K-12 students. Metrics look good (see pitch below me), and the books are audited by Deloitte so no reason to think the numbers are inflated.
Let us know on the ChinaCast Education CAPS page whether you think it will be the shorts or the longs who get schooled by this stock.
Profiting at the margins
Hotel and resort operator Felcor Lodging is a REIT that just made a $132 million offering to insiders to help pay for the purchase of the luxury Boston hotel, the Fairmont Copley Plaza. Considering the offering was priced at a nice discount to where the stock was trading, shares tumbled in response. But analysts are looking for the acquisition to pad earnings for the REIT in the future, so this may be one of those times investors are provided an opportunity to buy in alongside insiders at a similar price.
A number of REITs such as RAIT Financial Trust (NYSE: RAS ) have improved their financial situation leading to insiders taking large positions in their stock. Since the commercial real estate market didn't collapse as anticipated, there's a sense REITs will perform better now that normalcy is returning.
More than 84% of the 145 CAPS members rating Felcor believe it may surprise to the upside. You can keep an eye on how the REIT fares in its empire building by adding it to your watchlist.
A transforming event
Sun Bancorp was another that issued shares to insiders at a discount, this time for $81 million. The banking concern said its three largest shareholders, including Wilbur Ross, who already owns one-fourth of the company, would be participating in the sale.
Sun has $3.4 billion in assets, but a large percentage of them have had significant credit-related problems. Over 7% of its total assets are non-performing. The offering gives it the chance to address some of those issues and exceed the capital requirements imposed by the government.
Yet All-Stars like djkumquat and community members like kprock47 agree that the willingness of the large investors to take additional stakes in the bank increases the likelihood that not only will it survive, but thrive. Add Sun to the Fool's free portfolio tracker, and deposit your thoughts on the Sun Bancorp CAPS page.
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.
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