Can Following The Insiders Into VMware, Inc. (VMW) and NewLink Genetics Corp (NLNK) Lead To Big Rewards?

One strategy that has proven to be effective over time in determining whether a stock is moving higher is insider accumulation, due to one simple reason. Insiders sell shares for a variety of reason, but they buy them, just like us, because they believe the stock will move higher. Furthermore, they have an enviable vantage point of their company’s day-to-day operations, and they may also have a large investment of their own, which they would like to see increase in value. The following stocks have notable insider purchases, which may provide you with a nice stating point for your own investment research.

VMware-Nicira ImpactA cloudy contender

Virtualization and infrastructure solutions giant VMware, Inc. (NYSE:VMW) has seen better days; it recently got slammed on a disappointing earnings report. The outlook was not pretty, and the stock now sits virtually at its $76.25 52-week low.

Nonetheless, major shareholder and storage giant EMC Corporation (NYSE:EMC) seems to think the stock will move higher in the foreseeable future. From Jan. 31 to Feb. 2, EMC collectively gobbled up 289,500 shares at an average price of $77.70. That equates to an impressive $22.5 million worth of stock, and brings its total ownership to over 41.5 million shares now, or approximately 10% of the total VMware shares outstanding.

This is obviously a strong vote of confidence. EMC apparently thinks that VMware’s stock will move higher, and that the big hit in the share price does make the company more attractive. However, VMware is still trading at some lofty valuations for this Fool, with a trailing price-to-earnings ratio of 45, a price-to-sales of more than 7, and an enterprise value-to-EBITDA ratio of 24.

So while I still believe the cloud computing space has much more growth ahead of it as more of the public realizes its potential, I just cannot get behind a company that is still a little too expensive for my taste at this time.

If I were looking to place a bet on VMW, I think going indirectly through its major shareholder, EMC, makes more sense to me. EMC’s stock there trades at a much more reasonable (albeit not growing as fast as VMW) trailing P/E of 20, just over 2.5 times its price to sales, and 8.5 times its enterprise value to EBITDA.

Moreover, they both have basically the same returns on assets and equity of 6% and 14% respectively, so I think buying EMC is in some ways buying VMW on sale. Moreover, you get EMC’s highly profitable and consistently growing data storage business. With the continued growth of internet and other data uses, investors can reasonably expect that growth will continue and the stock will move higher over time.

A biotech bonanza?

NewLink Genetics Corp (NYSE:NLNK) is a biopharmaceutical company focused mainly on cancer treatment options and solutions. The company has been range-bound the last year, and it’s currently stuck in the middle of its 52-week range.

Nonetheless, major shareholder Stine Seed Farm sees rosier days ahead, buying a massive 880,000 shares on Feb. 4 at $11.40 apiece, equating to just over $10 million worth of stock. That brings Stine Seed’s total ownership to more than 7 million shares, or approximately 35% of the total shares outstanding. This is a very strong vote of confidence, because Stine Seed’s latest purchase equates to approximately 4% of the total value of the company.

Looking more closely at NewLink, we can see some positive developments. The company has either met or exceeded consensus analyst estimates in each of the last three quarters. It’s also cleaned up its balance sheet, now holding virtually no debt and approximately $27 million in net cash.

As is the case with most speculative biotechnology companies, NewLink’s returns on equity and assets are atrocious. The company usually has no earnings to speak of until its hopefully get approval for the next blockbuster drug. Of course, whether it actually will is anybody’s guess. If it does strike gold, investors will be handsomely rewarded — but if the trials do not go as well as expected, buyer beware.

As a more conservative investor, I would look more towards a well-established biotech firm like Amgen, Inc. (NASDAQ:AMGN). The company has a consistent revenue stream, now exceeding $17 billion annually; great returns on equity of 23%; and it’s trading at virtually its expected growth rate. At a current paltry 26% payout ratio, investors can expect its consistently growing 2.2% dividend yield to continue being hiked in the near future.

Moreover, as big pharmaceutical companies such as Pfizer and Merck continue to look for any way to replenish their depleting pipeline, well-received Amgen drugs such as Neulasta and Neupogen are thriving. They could make Amgen a possible buyout candidate, since Pfizer and Merck could support such a large acquisition. Of course, I never base my investment decision on an expected buyout — but it could still become a nice surprise.

Follow the inside scoop

Overall, I think that with such large insider buying that we see here, any shrewd investor should take notice and put these stocks on their radar.

The article Can Following The Insiders Into These Stocks Lead To Big Rewards? originally appeared on Fool.com and is written by Brian Gorban.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!