Insider purchases are generally a good sign for a stock. Statistically, studies show that stocks bought by insiders beat the market and we think that this is because it usually makes sense for insiders to diversify their wealth away from the company that employs them; when they don’t, and actually buy more shares, it is likely because they are very confident that better times are ahead. So seeing that John Keatley, CFO of Green Dot Corporation (NYSE:GDOT), bought 9,000 shares of the company’s stock on November 20th at an average price of $10.90 is a good sign. In addition, our database of insider trades shows multiple insiders buying stock in the $420 million market cap prepaid card company in November 2012 (check out which insiders have been buying). Considering that those studies we’ve mentioned tend to show that consensus insider buying is a particularly bullish signal (read more about consensus insider buying), we decided that the company was well worth closer inspection.
Green Dot, which provides prepaid cards under brands including Mastercard Inc (NYSE:MA) and Visa Inc (NYSE:V), has had a rocky ride since going public in November 2010. The stock is down about 77% from the IPO price, and lost over 50% of its value in late July after it reported a decline in earnings. The company recently filed its 10-Q for the third quarter of the year, in which it continued to show lower net income. This occurred despite a 16% increase in revenue compared to the third quarter of 2011, as costs grew at an even faster rate. We’d note that Green Dot does have considerable cash on its balance sheet- about $240 million in cash, cash equivalents, and marketable securities classified as current assets. We’d also note that most of the company’s revenue stems from products sold at Wal-Mart Stores, Inc. (NYSE:WMT), giving it significant customer concentration in a sense.
The market seems very bearish on Green Dot’s business, in contrast to the behavior of insiders. Debra Fine’s Fine Capital Partners was the only hedge fund or other investor in our database of 13F filings to report a position worth more than $5 million at the end of September. Israel Englander’s Millennium Management and billionaire Ken Griffin’s Citadel Investment Group had between $3 million and $4 million invested, though those positions paled in comparison to the size of these funds. With 20% of the shares outstanding held short, in fact, our guess is that the hedge fund community has more short than long positions in Green Dot Corporation. At its current price, it trades at only 9 times trailing earnings and its enterprise value is only 2.2x trailing EBITDA. The company insiders clearly consider the stock beaten down by the market, and to see consensus insider buying is interesting. Perhaps the business’s decline can be halted, which would make the stock a good value at these prices.
NetSpend Holdings Inc (NASDAQ:NTSP) is another company offering prepaid cards. At a market cap of about $780 million, it is close to twice the market value of Green Dot. It’s also widely shorted, with 13% of the float held short as of the most recent data. The market seems considerably more bullish on Netspend, however: the stock price has nearly doubled in the last year, and the fact that it trades at 50 times trailing earnings suggests that investors are considerably more confident in growth here. Wall Street analysts also expect better numbers in the future, and so the forward P/E is 18 and the five-year PEG ratio is 0.6. The sentiment towards these two companies is clearly different, and it might be worthwhile to look at them in more detail and see if this spread in valuation is justified by the specifics of their businesses.
We’re leery of getting into a stock which has so little representation in the hedge fund community and which is such a popular short, regardless of the insider purchases. Yet on average stocks bought by insiders tend to outperform the market and we can’t help but think that Green Dot Corporation would clearly be cheap if earnings were holding steady.