You're Not the Only One Buying Here

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 buy for only one: They think the price is going to go up!

Today, I've highlighted two insiders who have made big purchases of their own company's stock in the past 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. I then paired 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.

Stock

Insider, Position

Market Value of Transactions

CAPS Rating
(out of 5)

Synta Pharmaceuticals (Nasdaq: SNTA  ) Bruce Kovner, director $5.0 million ***
EXCO Resources (NYSE: XCO  ) WL Ross & Co., 10% owner $2.1 million ****

Source: FinViz.com.

Although following the lead of insiders can be profitable, we still recommend you do further due diligence to determine whether these stocks are a good fit for your own portfolio. This isn't a list of stocks to sell or buy, just the inside track on companies you might want to check out further.

You can bank on it
Without any products on the market, development-stage biotech Synta Pharmaceuticals hopes ganetespib will be the catalyst that puts it on the map for treating cancer, including tumors of the lung, colon, pancreas, breast, prostate, and eye. In the meantime, it's going to need to survive by offering stock on the open market, which investors don't like as it dilutes their holdings. Its stock fell recently after it offered 7 million shares at $4.40 each, for which it hopes to receive about $28.6 million.

In the past, it has formed partnerships with established pharmaceuticals like Roche and GlaxoSmithKline. The latter partnership failed; while the former remains in effect, Synta needs to achieve various development milestones before it will receive additional money.

The CAPS community has faith, as 91% of those rating the drug developer think it will outperform the broad market indexes. Let us know in the comments section below or on the Synta Pharmaceuticals CAPS page if it will ride out the storm, then add it to your watchlist to see how it plays out.

Feeling gaseous
Natural gas producers are reeling from the plunge in prices as drillers continue to exploit new sources and deploy new technologies to access hitherto unreachable deposits. Independent explorer EXCO Resources saw its shares drop 58% from their highs; they're down roughly 20% in the last month alone. Quicksilver Resources (NYSE: KWK  ) finds itself in a similar dire situation as analysts believe it will need to shut some wells to rein in its expenses while bolstering its tenuous capital position to survive. The other alternative will be finding a larger partner to buy them out. Ultra Petroleum (NYSE: UPL  ) , which has a good chance of burning bright this year, has already teamed up with EXCO in the Marcellus shale region.

Last August, Wilbur Ross (CEO of WL Ross & Co.) made some big purchases of stock that had EXCO requiring him to enter into a standstill agreement and pinky-swear he wouldn't buy the company or work with someone else to do so.

CAPS member jw68 is counting on EXCO to ultimately report earnings that surprise the market, a point CAPS All-Stars wouldn't disagree with, as 96% of those rating the gas explorer believe it will beat the Street. Add EXCO Resources to your watchlist and let us know in the comments section below if you think it's only a matter of time before natural gas recovers.

On the inside track
These two companies still face big hurdles. Discover two other small-cap stocks The Motley Fool found with solid state contracts that have the potential to deliver multibagger returns. This special report is free for the asking, but it's only available for a limited time, so ask for your copy today!

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Ultra Petroleum and GlaxoSmithKline. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.


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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 January 17, 2012, at 7:55 PM, rsinj wrote:

    "Executives can sell their stock for any reason, he said, but they buy for only one: They think the price is going to go up!"

    People love pithy quotes from Lynch and Buffett when it supports their position. However, most times, there is little meat behind it.

    Insiders sell for only one reason, which is the same as the only reason they buy - because they believe the alternative (whatever that may be) will produce less value for them (based on whatever metric they use to determine "value" - be it monetary, aesthetic, or personal). If the insider is selling, it means they aren't buying and that's all I need to know.

    As for XCO, Ross is getting his a** handed to him. He's been buying continually/heavily since the stock was at $18. It's at the point where he's clearly throwing good money after bad. Ironically, his buying was furious all the way down to the $9's. Since the stock has dipped into the $8's - nothing.

    Now, with natural gas hitting unprecedented lows, XCO has a problem. They are leveraged to the hilt. The stock price is low. Earnings will be taking a hit. How long will the dividend be sustained? How will they service the $1.7 billion debt being carried? I see earning warnings/losses on the horizon, and asset sales or floating additional stock. No matter which route is chosen, it is extremely bad for XCO. Assets they've acquired cannot be sold for what they were purchased at - with natural gas so low, who will pay top dollar? If additional stock is floated, it will 1) dilute current shareholders, 2) since the stock is so low they will need to issue more of it diluting shareholders in a bigger way than if the stock were higher, and 3) floating new shares will depress the stock price further from the low it currently sits at.

    I think looking at Ross' purchases of XCO is educational - not for the reason you bring up, but to show investors that well-known insiders who buy like crazy can be very wrong. I equate this to what Sumner Redstone did with Midway Games a few years ago. My guess is the outcome here will likely be similar.

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