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John Dorfman

Dorfman: Insiders at Cliffs, Green Dot on the right track with stock purchases

John Dorfman
| Tuesday, March 10, 2015, 12:01 a.m.

Few stocks have been pounded worse in the past half dozen years than iron ore miner Cliffs Natural Resources Inc. (CLF). Since mid-2008, the shares have fallen from $119 to slightly more than $6.

In February and March, four insiders stepped up to the plate and bought this battered stock. CEO Lourenco Goncalvez spent $650,000 last week to buy 100,000 shares.

With Europe's economy slow and China's slowing, the world has all the iron ore it needs — and then some. But the Cliffs insiders must figure that the doldrums will not last forever.

Commodities in general and iron ore in particular might never regain the intense favor they had with investors six years ago. Corporate net worth at Cliffs has gone negative, and there is a risk of bankruptcy.

Nevertheless, I think Cliffs insiders are on the right track with their recent purchases. The company has about $290 million in cash, and it has mines that it could probably sell if necessary — albeit for a very unattractive price compared with a few years ago.

I think Cliffs is an interesting bottom-fishing speculation.

Green Dot

At Green Dot Corp. (GDOT), founder and CEO Steven Streit spent nearly $3 million in February to purchase 206,800 shares of his company's stock.

Based in Pasadena, Green Dot sells reloadable prepaid debit cards. Among other things, the cards can be used to transfer cash, even if one party to the transaction doesn't have a bank account.

Green Dot shares have been mostly on the downswing since early 2011, when they sold for $60. The recent price — $16.45 — is 18 times the past four quarters' earnings, but only 11 times the earnings that analysts expect for 2016.

Green Dot stock is reasonably priced by a couple of measures. It sells for 1.5 times revenue and 1.4 times book value (corporate net worth per share). And sales and earnings have been growing pretty rapidly.

I think people who follow Streit's lead will probably be happy.

Foundation Medicine

The CEO at Foundation Medicine Inc. (FDI) of Cambridge, Mass., has been selling shares.

Foundation offers “molecular information products” to aid doctors and scientists in research and treatment. Sales last year were $28 million, and the company, like many young biotechnology firms, has yet to post a profit.

Foundation CEO Michael Pellini sold 153,300 shares on March 4 and 5 for $7.2 million. But his stash of stock was not diminished because, on the same days, he exercised stock options to acquire 268,560 shares. The cost of exercising the options ranged from 84 cents a share to $7.12. That's far below the market price of more than $47.

I would avoid these shares. The price is 21 times revenue, and there are other great firms working in molecular analytics.

Last year

The column you are reading is the 33rd one I've written since 1997 about company insiders' purchases and sales.

A year ago, I recommended three stocks that had shown insider buying: Employers Holdings Inc. (EIG), General Electric Co. (GE) and HomeStreet Inc. (HMST).

Employers Holdings, a workers' compensation insurer based in Reno, did OK, rising 15.22 percent from March 10, 2014, through March 6. But the other two recommendations were duds.

GE advanced just 1.62 percent, compared with 13.16 percent for the Standard & Poor's 500 Index. HomeStreet, a banking company headquartered in Seattle, declined 2.69 percent.

The figures are total returns, including reinvested dividends.

Cumulative record

Longer-term, this series has a good record, based on an analysis of the columns from 1999 through last March.

The 47 stocks I have recommended after they showed insider buying have beaten the S&P by 6.6 percentage points on average during the 12 months from publication.

The 17 stocks for which I noted insider selling have trailed the S&P by a half-point.

There were seven stocks for which I noted insider buys but recommended against purchase. Those have trailed the index by 5.2 percentage points.

Finally — this is the part that's funny but a little embarrassing — there were six stocks for which I noted that insiders were buying, but made no comment or an ambiguous one. Those six stocks beat the S&P by 25.2 percentage points on average.

Bear in mind that results for my column selections are hypothetical and don't reflect trading costs or taxes. Past performance does not guarantee future results, and the performance of my column picks shouldn't be confused with results I obtain for clients .

I believe that paying attention to what insiders are doing can tilt the odds meaningfully in your favor.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston and a syndicated columnist. He can be reached at jdorfman@dorfmanvalue.com.

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