“Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.”
According to Peter Lynch, investors should follow insiders’ buys closely in order to pick the right investment opportunities. In February, there were four CEOs who bought shares of their own companies, including First Commonwealth Financial (NYSE:FCF), Computer Programs & Systems, Inc. (NASDAQ:CPSI), Bally Technologies Inc. (NYSE:BYI) and Electronic Arts Inc. (NASDAQ:EA). In this article, we will look closer at the first two companies to determine whether or not investors should follow these CEOs into their companies.
A Pennsylvanian Bank
First Commonwealth is a provider of consumer and commercial banking services, and trust and wealth management services, with more than 110 community banking offices in Pennsylvania. As of December 2012, the majority of First Commonwealth’s deposits, $2.54 billion, or 55.8% of total deposits, was savings deposits. Time deposits ranked second, with more than $1 billion. The third biggest deposits source was noninterest-bearing demand deposits, at $883 million. The largest loan category was Residential Real Estate, $1.24 billion, or 29.5% of the total loan portfolio. Commercial & Industrial ranked second with $1 billion in loans. In 2012, First Commonwealth generated 3.61% in net interest margin. On Feb. 6, Michael Price, the President and CEO, bought 2,600 shares at around $7.08 per share, with the total transaction value of only $18,408. At the current trading price of $7.25 per share, the total market cap is $724.3 million. The market is valuing First Commonwealth at 12.3x forward earnings and 1x book value. Currently, the bank is paying a 2.8% dividend yield to shareholders.
Consistently High Return but Not so Cheap
Computer Programs and Systems, Inc. (NASDAQ:CPSI) is a healthcare information technology company for small and mid-size hospitals. The majority of its sales, $73 million, or 40%, was generated from support and maintenance segment. The second biggest revenue contributor was system sales, generating $72.5 million in sales in 2012. For the last 10 years, Computer Programs has been consistently generating a high return on invested capital that has been in the range of 26.36% – 69.70%. Over the past 12 months, the net margin was 15.42%, while the return on invested capital was 46.3%. The high returns have been generated without the help of any leverage. As of December 2012, Computer Programs had $57.2 million in total stockholders’ equity, $8.9 million in cash, and no debt. At the current trading price of $49.10 per share, Computer Programs is worth $544.15 million on the market. It was valued at 11.76x EV/EBITDA and 8.5x book value. Computer Programs is also a consistent dividend paying company, with a dividend yield of 3.9%. In February, several insiders including the Chairman, the CFO, the CEO, and Senior VP bought 11,800 shares, with the total transaction value of more than $560,000.