Famed money manager Peter Lynch told us executives can sell their stock for any reason but typically buy only for one: They think the price is going to go up!
Today I'm highlighting medical device maker Opko Health (NYSE: OPK ) , which has seen its chairman and CEO buy nearly $1 million worth of stock in the past week and has purchased some $14.6 million since the middle of June. These aren't option grants but rather purchases made on the open market just like you and me.
Opko Health Snapshot
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Although following the lead of insiders can be profitable, I still recommend you do further due diligence to determine whether this stock would make a good addition to your own portfolio. So this isn't a call to buy, but just the inside track on a company you might want to check out further.
Putting your money where your mouth is
Is it a belief that his company is undervalued that keeps Opko Health Chairman and CEO Philip Frost buying shares even as prices decline, or is there some other ulterior motive? It would certainly seem to be an indication of a belief in his company's future that he gobbles up shares on a regular basis, and it's often considered a bullish sentiment when insiders continue to buy even as the stock continues to fall.
Maybe he's just trying to counter the significant short selling going on with his stock, which has a sky-high 43 days to cover representing 23% of the public float (The Motley Fool believes anything over seven days is generally considered to be a lot, but even shorting Fools would be worried about these levels, since any uptick could lead to a massive short squeeze). In short, someone's going to come out of this with a smile.
A taxing decision
In the second quarter, Opko enjoyed a 21% increase in revenues, as it made several acquisitions over the past year that contributed to the total, but losses doubled to $0.04 a share, which is probably what weighs most on investors' minds. The medical-device maker can't seem to gain the traction needed to get ahead.
There's also a looming time bomb ticking for all device makers as, President Obama's health-care reform law imposed a 2.3% excise tax on medical-device sales that goes into effect on Jan. 1. It's estimated the tax will raise $30 billion over the next decade.
Getting ahead of the curve, Boston Scientific (NYSE: BSX ) built an R&D center in Ireland and announced it was eliminating 1,200 to 1,400 jobs and moving them to China because of it, while Stryker said it's cutting its workforce by 5% and restructuring its business to save $100 million ahead of the tax. Privately held Cook Medical says the bottom-line impact is actually an additional 15% tax on actual earnings and that it expects to see its tax burden rise 50% next year. Zimmer and Covidien have both laid off hundreds of employees as a result of the pending tax.
Opko does have new products coming to market, such as a new Alzheimer's diagnostic test that it's partnered with Bristol-Myers Squibb (NYSE: BMY ) and it was recently awarded a contract by NASA to implement its point-of-care diagnostic platform -- which can return blood results in just 10 minutes -- for use on the International Space Station. New taxes can be burdensome, but companies have to also deal with the here and now of their business, too.
Yet perhaps Frost is not particularly concerned, since some investors believe he may be setting Opko up to be sold. He did so previously, selling Ivax Pharmaceuticals to Teva Pharmaceuticals (Nasdaq: TEVA ) , where he also serves as chairman, and he sold Key Pharmaceuticals to Schering-Plough before Merck (NYSE: MRK ) acquired it.
Still a risky bet
Yet risks do abound. For all of Frost's investment, the company itself still bleeds cash and has only turned in two profitable quarters in its history. Although I see the potential for a short squeeze boosting its stock price at least temporarily, I find it hard to see any gains being sustained until its operations become more firmly entrenched. With a big tax bite looming as well for it and other medical-device makers, it seems a risky proposition. Of course, by that time, Frost may have sold the company and moved on, but I'd hold off on making any moves here.
You can tell me in the comments box below whether you think the chairman is setting Opko Health up for a sale or whether its new products will be enough to offset any tax that comes due.
On the inside track
Medical-device makers like Opko offer investors an interesting opportunity. You might want to read The Motley Fool's special premium report covering MAKO Surgical and learn all you need to know about the company, its opportunities, and risks. Get your copy of the report, and the ongoing coverage it will offer, today.