If you're looking for undervalued stocks with that insiders are willing to bet on, this may be an interesting starting point for your own analysis.
Insider executives' trading activity can often provide useful clues about the health of a company, as company management often has access to confidential information about their firm's prospects. So if these insider execs are using their own cash to buy the shares of their employers, you better pay close attention.
That said, insider executives are also just normal investors, like you and me. Meaning, they don't always get it right. That's why it's always a good idea to see what other investors think of a stock‚ too.
To get a better perspective on the insider buys mentioned below, we analyzed each company's price to earnings per share (P/E) ratio. The P/E ratio tells you how much investors are willing to pay for $1 of a company's earnings -- so the lower the ratio, the "cheaper" the stock. By contrast, if the P/E ratio is higher than industry averages, it signals that the company is trading at a premium.
To create this list, we started with the following theoretical observation about price to earnings per share (P/E) ratios.
First, we assigned the P/E ratio a value of constant, "K." Starting from this assumption, it follows that there should be a linear relationship between price and earnings per share:
If P/E = K
then P = (K)(E)
In other words, if there is a mismatch between growth rates in projected earnings per share values and the stock's price, a mis-pricing may have occurred -- creating an opportunity for value investors.
All of the stocks mentioned below have seen an increase in the current year EPS analyst projection over the last 30 days. For each of these stocks, the price change has lagged the change in EPS projections, indicating that these stocks may still have to price in some good news.
Of course, this approach isn't 100% accurate. There is no reason to believe that P/E should be equal to a constant at all times -- it's just a simplifying assumption we're using to build a screen. But the goal here is to give you a starting point in finding potentially undervalued rally stocks. Full details below.
In addition, all of these stocks have seen significant insider buying over the last six months.
Insiders and Wall Street analysts think these stocks still have some good news to be priced in over the next couple of weeks -- do you agree? (Click here to access free, interactive tools to analyze these ideas.)
1. The McClatchy Company (NYSE: MNI): Newspapers Industry. Over the last 30 days, analyst projected EPS has increased by 8.11% (from $0.37 to $0.4), while price changed by -19.83% over the last 30 days (from $3.43 to $2.75). Over the last six months, insiders have been net buyers of 318,799 shares, which represents about 0.81% of the company's float of 39.43M shares.
2. Scientific Games Corporation (Nasdaq: PSEC): Multimedia & Graphics Software Industry. Over the last 30 days, analyst projected EPS has increased by 25% (from $0.24 to $0.30), while price changed by 5.22% over the last 30 days (from $9.19 to $9.67). Over the last six months, insiders have been net buyers of 4,565,257 shares, which represents about 16.18% of the company's float of 28.22M shares.
3. Prospect Capital Corporation (Nasdaq: SGMS): Asset Management Industry. Over the last 30 days, analyst projected EPS has increased by 12.75% (from $1.02 to $1.15), while price changed by -1.6% over the last 30 days (from $11.58 to $11.39). Over the last six months, insiders have been net buyers of 128,266 shares, which represents about 0.13% of the company's float of 96.12M shares.
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. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen does not own shares of any companies mentioned.
