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Insatiable buying at Opko Inc.

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Tuesday, June 4, 2013, 12:01 a.m.
 

At Opko Health Inc., a drug development company in Miami, CEO Philip Frost just keeps buying his own stock.

In May, Frost made 20 purchases, totaling more than 800,000 shares. He now owns more than 125 million shares in the company, which has about 337 million shares outstanding. At the recent price of $6.62, his stake is worth more than $800 million.

Opko is not making money, at least not yet, but its revenue jumped to $31 million in the latest quarter, far higher than in any previous quarter.

Frost is no babe in the woods. He is also chairman of Teva Pharmaceutical Industries Ltd., the world's largest generic drug company, which is based in Petak Tikvah, Israel. And through an investment company, he has stakes in more than a dozen other companies.

There has been speculation that Frost is buying shares in Opko to prop up the stock price, in order to assure that Opko's proposed acquisition of Prolor Biotech Inc., another Israeli company in which Frost is involved, will go through.

I, however, believe Frost's explanation — that he is buying Opko shares because he believes in the company's future.

The shares aren't my cup of tea because I prefer more seasoned companies with a fairly consistent record of profitability. But for folks who like earlier stage companies that look promising, these shares might be a good fit.

Why should you care what the insiders are up to? Because corporate executives, particularly chief executives and chief financial officers, are much better than the average person at guessing which way their stock will head.

In this column over the years I have written about insider purchases and sales 24 times; today's column is the 25th. So far, I have tabulated the results for 11 columns — those published from February 8, 2001, through June 5, 2012.

The 27 stocks I recommended on the basis of insider buying have risen, on average, 19.4 percent in the 12 months following publication. By contrast, the Standard & Poor's 500 Index showed an average loss of 1.3 percent. Twenty of the 27 recommended stocks rose.

There are 10 older columns, written in 1997 through 2000, for which I haven't yet tabulated the results. It is slow going because the old price data is hard to find.

There are also three recent columns for which 12 months haven't yet elapsed. I'm opposed to highlighting results for periods shorter than a year because I think it contributes to disadvantageous short-term thinking.

In the tabulated data, there are five stocks that showed insider buying but that I said I wouldn't buy. Those have underperformed the S&P 500 by a dozen percentage points.

To my chagrin, there were also five stocks where I noted insider buying but offered no opinion or an ambiguous comment. Those have done particularly well, with an average 12-month gain of 45.3 percent, compared with 13.3 percent for the S&P 500.

Insider selling was noted in five stocks. Those were down an average of 13.3 percent in 12 months, compared with a loss of 0.3 percent in the index.

I think these figures are strong evidence that it pays to pay attention when insiders act. And if my data don't persuade you, there are plenty of academic studies that reach the same conclusion.

Bear in mind the results for my column recommendations shouldn't be confused with performance of real portfolios I manage for clients. The column results are theoretical and don't reflect trading costs or taxes. Also, past performance doesn't predict future results.

At Charter Communications Inc., an Internet service provider from Stamford, Conn., nine insiders have sold shares this year.

One of the sellers was Michael Hargis, the chief marketing officer, who sold 20,682 shares, or about $2.2 million worth at current prices. He has no shares left, according to the Bloomberg database.

John Bickham, chief operations officer, has sold more than 48,000 shares this year, some of which were to pay for exercising options. He has close to 183,000 shares left, worth about $20.5 million.

Thomas Rutledge, the CEO, has sold about 68,000 shares this year. But he has more than 542,000 shares left, worth about $609 million.

I think Charter stock should be sold. The company has more than $12 billion in long-term debt, which is about 86 times stockholders' equity.

Charter is expected to show a small profit this year but had losses the past three years. The stock looks expensive at 88 times book value and 45 times estimated earnings for 2014.

John Dorfman is chairman of Thunderstorm Capital LLC in Boston. He can be reached at jdorfman@thunderstormcapital.com

 

 
 


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