5 mid-cap stocks that insiders love

April 17, 2014, 12:10 p.m. EDT

By Meena Krishnamsetty and Javier Hasse

Insiders are contrarian investors. They get greedy when others are fearful and they dump their holdings when investors are greedy. The research we conducted at Insider Monkey has shown that stocks bought by insiders tend to outperform market indexes . Although an insider purchase is a good signal, it shouldn't be the only factor you take into account when making decisions. Investors must look into other elements, like the company's fundamentals, valuation and institutional ownership in order to make better decisions. In this article we will look into five mid-cap companies with insider purchases and analyze other essentials to help you see if they stand as attractive long-term investment options. 

Biotechnology

 

First in our list is Alnylam Pharmaceuticals, Inc. ALNY +0.24% . This $3.88 billion market cap biopharmaceutical company develops novel therapeutics based on RNA interference. On March 25, Sanofi-Aventis , a large Shareholder -which owns more than 10% of the company´s common stock, purchased 344 thousand shares of the company for $66.88 per share. After spending more than $23 million in Alnylam's stock, Sanofi holds (indirectly, via a wholly-owned subsidiary, Genzyme Corp.) more than 9.1 million shares of the biopharmaceutical. 

If we only analyze Alnylam's fundamentals, these purchases make no sense whatsoever: the company boasts negative margins and returns, while its stock´s valuation, at 80 times the company´s sales and 14.6 times its book value, seems a little too high. However, its long-term growth prospects and upside potential (a mean price target of $101 per share implies an upside potential of more than 68%) make of this company a much more appealing investment option. 

In addition, the purchase must be understood in the context of Sanofi's $20.1 billion acquisition of Genzyme, which took place in 2011. Alnylam's Patisiran, a therapy for a life-threatening illness that damages the nervous system, and the rights to three other drugs are only some of the benefits that Genzyme gets from Sanofi´s increasing participation in Alnylam. 

On top of insiders and analysts, several major hedge funds seem to feel bullish about this stock. For instance, David Greenspan ´s Slate Path Capital and Richard Gerson and Navroz D. Udwadia ´s Falcon Edge Capital have recently reported new positions in Alnylam, with 1 million shares each.

The other biotech company that witnessed high insider activity over March is Intrexon Corp XON -2.49% , a $2.5 billion market cap synthetic biology company that designs, builds and regulates gene programs using its proprietary -and complementary- technologies. Over March, the company witnessed three insider purchases. 

On March 27, the company's CEO -for 8 years already, Randal Kirk , bought 243,001 shares of the company, for $25.72 per share. Through several holdings , Mr. Kirk owns more than 62.5 million shares of Intrexon's stock, which makes him a more-than-10% owner. In addition, Ian Gregory Frost , Senior Vice President at the company's Health Sector, started a position in the stock with 100,000, though three separate purchases made between Feb. 28th and March 4. Among the 100,000 shares, 61,500 shares were procured between March 3 and March 4, for prices ranging from $24.56 per share to $26.15 per share, inclusive. 

Once again, looking at Intrexon's fundamentals alone doesn't provide an explanation for this strong bet. The company displays negative margins and returns, and its valuation, at 42 times its sales looks pricey. However, its growth prospects and upside potential make of this company a much more interesting investment option. In addition, March 2014 was an important month for the company, since it acquired Merck MRK +0.70% 's wholly owned subsidiary Sirna Therapeutics, Inc. 

Major hedge funds also seem to believe in this firm´s potential. Several prominent investors, including Dan Loeb (Third Point) and David Einhorn (Greenlight Capital) do not only hold large stakes in the company, but also, have increased their positions over the last reported quarter. 

Oil & Gas Midstream

 

In the oil and gas midstream industry, two mid-cap companies experienced insider activity over the past month. The first one is Plains GP Holdings LP PAGP -2.81% , a $3.7 billion market cap firm that, through its general partner Plains All American Pipeline, L.P. PAA +0.09% , is engaged in the transportation, storage, terminalling and marketing of crude oil and refined products. Plains GP IPOed last October and managed to raise $3 billion in its debut. 

On March 13th, Victor Burk , a Board Director, started a position in the company with 3,000 shares. He paid prices ranging from $27.08 per share to $27.09 per share. His holdings are valued at approximately $84,000. 

Same as in the previous cases, Plains GP Holdings' margins and returns stand quite below its industry's average values. In addition, its stock trades at sky-high valuations in relation to the firm´s earnings (256x P/E) and book-values (16.9x P/B). However insiders, analysts, and even hedge funds still seem to think this stock is worth it. UBS recently raised its price target for Plains GP to $32 per share, which implies an upside potential of roughly 11%. In addition, about 20 prominent investors have taken positions in it. For instance, Alec Litowitz and Ross Laser 's Magnetar Capital recently added more than 3.5 million shares of this stock to its equity portfolio. This holding is worth more than $98 million, accounting for approximately 2% of its total holdings. Other investment gurus with large stakes in the company that are worth mentioning are Phill Gross, Robert Atchinson , Doug Silverman , Ken Griffin , D.E. Shaw and Israel Englander . 

The other oil and gas midstream company in our list is MPLX LP MPLX +0.12% , a limited partnership recently formed by Marathon Petroleum Corporation (to own, operate, develop and acquire crude oil, refined product and other hydrocarbon-based product pipelines and other midstream assets), with a market cap of more than $3.6 billion. Also on March 11th, an insider acquired stock from the company: Richard C. Wilson , Board Director, purchased 3,000 shares of the company at an average price of $49.42 per share. Following the reported transaction, the insider held 8,565 shares of the company, valued at more than $400,000. 

Opposite to the aforementioned companies, wide margins and decent returns, coupled with a cheap valuation (12.7 x P/E, compared with the 39.8 x industry average) make this stock an attractive investment option. Furthermore, long-term EPS growth projections that double its peers' mean and a 2.57% dividend yield make it a great option for patient investors. 

And a U.S. Regional Bank

 

Finally, we would like to take a look at First Financial Bankshares Inc FFIN -0.39% , a $2 billion market cap financial holding firm. Since the beginning of the year, the company has seen at least 12 insider purchases take place: 

Johnny Trotter , one of the bank´s Board Directors, has been the most active insider this year. Starting on Jan. 31, and through 8 different purchases, Mr. Trotter added more than 12,500 shares to his holdings (both direct and indirect holdings), having paid prices ranging from $59.40 per share, to $62.00 per share. In his most recent transaction, which took place on March 14, he procured 7,100 shares of the company for $60.10 each, increasing his holdings to more than 195,000 shares of the company, valued at than $12 million. 

Another active insider was Hamilton Murray Edwards , another Board Director. Between Jan. 29 and Feb. 3rd, he bought more than 1,500 shares of the company, for prices between $59.80 per share and $62.40 per share. He now owns about 75,000 shares of the firm. 

Despite the insider bullishness and the firm´s above average margins and returns, analysts don´t seem to like this stock. In fact, WSJ's consensus rating stands at "underweight," with five analysts recommending a "hold," and three more advocating for a "sell." With an average price target below the current stock price, upside potential doesn't look promising. 

The stock is also unattractive in terms of valuation . However, the company's growth prospects and history (it holds a record of 27 years of consecutive earnings growth) make it an investment worth considering for the long-term -especially if the valuation dropped. In addition, a 1.7% dividend yield makes your wait worthwhile.