Insider activity is closely monitored because it can often be used as a indication of a company's future, or at least what insiders expect for their company's future. After all, who knows the inner-workings of a company better than those that work there?
Vicker's Weekly Insider Report, published by Argus Research, regularly conducts analysis on the number of shares that insiders collectively sell in the open market and the number that they have purchased. The data is compiled as a sell-to-buy ratio.
Four decades worth of data place the mean sell-to-buy ratio between 2-1 and 2.5-1. Lower readings signal bullish sentiment, while high ratios are considered to signal more bearish sentiment.
What are company insiders telling us?
So, what's going on right now? According to Vicker's, the ratio for the week ending last Friday was 3.79-to-1, which is well above its long-term average.
But don't get too concerned. Mark Hulbert of Market Watch writes, "You should be careful not to read too much bearish significance into this recent level ... It's entirely natural for insiders to pick up the pace of their selling in the wake of a market rally -- and, therefore, not particularly surprising."
What's more, "The Vickers' ratio is no where near as high as the level to which it reached earlier this year, in the weeks leading up to the April 29 bull market high. In some of those weeks, in fact, the sell-to-buy ratio was above 7-to-1."
Ultimately, the ratio isn't very telling right now. "Your reaction to recent insider behavior will depend on whether you are inclined to see the glass as half full or half empty."
Investing ideas
So, we were wondering, which undervalued stocks look most appealing to company insiders?
To explore this idea, we started with a universe of about 190 stocks backed by significant insider buying over the last six months.
From this list, we collected data on levered free cash flow, and identified the names that appear undervalued relative to levered free cash flow.
Insiders seem to think these undervalued stocks present real appreciation potential -- do you agree?
List sorted by the relative size of recent insider buying. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. Motorola Solutions (NYSE: MSI ) : Provides business and mission critical communication products and services for enterprise and government customers worldwide. Over the last six months, insiders have been net buyers of 17,600,969 shares, which represents about 6.72% of the company's float of 261.88M shares. Levered free cash flow at $1.19B vs. enterprise value at $10.85B (implies a LFCF/EV ratio at 10.97%).
2. Live Nation Entertainment (NYSE: LYV ) : Operates as a live entertainment company internationally. Over the last six months, insiders have been net buyers of 4,457,940 shares, which represents about 3.67% of the company's float of 121.34M shares. Levered free cash flow at $275.82M vs. enterprise value at $2.38B (implies a LFCF/EV ratio at 11.59%).
3. Lions Gate Entertainment (NYSE: LGF ) : Engages in the motion picture production and distribution, television programming and syndication, home entertainment, family entertainment, new channel platforms, and digital distribution activities. Over the last six months, insiders have been net buyers of 919,823 shares, which represents about 1.74% of the company's float of 53.01M shares. Levered free cash flow at $451.51M vs. enterprise value at $1.83B (implies a LFCF/EV ratio at 24.67%).
4. Central European Media Enterprises (Nasdaq: CETV ) : Operates as a vertically integrated media company operating broadcast, content, and new media businesses in central and eastern European countries. Over the last six months, insiders have been net buyers of 433,358 shares, which represents about 1.73% of the company's float of 25.11M shares. Levered free cash flow at $363.86M vs. enterprise value at $1.87B (implies a LFCF/EV ratio at 19.46%).
5. Dell (Nasdaq: DELL ) : Provides integrated technology solutions in the information technology (IT) industry worldwide. Over the last six months, insiders have been net buyers of 17,230,709 shares, which represents about 1.11% of the company's float of 1.55B shares. Levered free cash flow at $2.98B vs. enterprise value at $20.63B (implies a LFCF/EV ratio at 14.44%).
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen does not own any of the shares mentioned above. Rebecca Lipman owns shares of Dell. Data sourced from Yahoo! Finance.
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