Tuesday, January 16, 2007
Any serious investor needs to consider insider trading.
Few things are as compelling as seeing a company’s executives spending their own money to buy shares in their own company. And few indicators predict future share performance like insider trading.
Numerous studies have been published showing that insiders historically outperform the market. Having tracked these guys for years, I can tell you from personal experience that corporate insiders are almost always right about future stock performance.
Because of this, I’m always trolling through SEC filings for insider transactions. Last week, Online Resources (NASDAQ: ORCC) popped up on my radar.
ORCC provides online services to small financial firms. Most large brokerage houses or banks have their own tech teams and servers for this kind of thing. However, many regional and community-based financial institutions don’t have the budget for this.
I’m talking about financial groups with under $10 billion in assets. Now, $10 billion may not sound small to you, but consider that larger banks, such as Bank of America or Wachovia, manage more than $1 trillion in assets.
Practically every bank or financial institution in the U.S. offers online services like bill paying and investing. Jupiter Media Matrix, a tech research firm, forecasts that the number of U.S. households using online banking will nearly double – from 31 million in 2003 to 54 million – in 2007.
If small-time financial outfits want to compete with larger institutions, they have to offer online services. Since these firms don’t have the budget to create their own tech divisions, they outsource it to ORCC. As e-commerce has grown in the last seven years, so has ORCC’s business.
Since 1999, revenues have jumped eightfold. In 2003, the company first turned a profit. Since then, net income has grown sixfold. Net margins are up to 20%. For every $1 ORCC make in sales, nearly a quarter goes into the bank. Since attaining profitability, ORCC has shown investors an average annual return on equity of 26%.
ORCC shares tumbled mid-November on news of a 3Q06 loss of $1.1 million compared to profits of $2.3 million for 3Q05. Add this to a shelf registration of 13 million shares – an amount that could dilute ORCC’s shares by more than 50% – and ORCC stock plummeted.
ORCC’s insiders took advantage of the dip to buy up some $177,000 worth of its stock in one week.
It’s not hard to see why. ORCC’s 3Q06 costs spiked primarily because the company acquired Princeton eCom, an electronic bill services company, in July. The acquisition is a good one for ORCC’s business. And it’s little surprise that a $180 million acquisition hurt ORCC’s margins: The combined company is worth only $240 million.
However, I’m not as sanguine about the shelf registration. Four million of the 13 million shares were used during the Princeton acquisition. But the remaining eight million are on deck, and there is no telling when ORCC might bring those to market. So at any point, shares could be significantly diluted.
However, it’s clear that ORCC’s insiders aren’t worried about this. In 2006, they bought more than $263,000 worth of ORCC’s stock. And this bullishness isn’t anything new. In 2005, they bought $221,000 worth of stock. And in 2004, it was $136,000 worth of stock.
Those insiders who bought in 2004 have already seen gains over 80%. To see the same insiders – the CEO, the COO, and directors – buying again today is a bullish sign of future performance. And since these are open market purchases, they show little concern for any massive share dilution. My guess is we’ll only see those other eight million shares hit the market if ORCC makes another large acquisition.
What I see is a rapidly growing business, in a booming niche industry – online services for regional bankers – down because of a one-time acquisition. Even better, the insiders are buying.
The big tech money flow continues... new highs for Hewlett-Packard, Cisco, Level 3, and Microsoft.
Strong times for retail: Nordstrom, Liz Claiborne, Aeropostale, and Ross all hit new highs.