(By Rich Bieglmeier) Super-storm Sandy closed the market last Monday and Tuesday. As a result, the number of insider transactions last week was limited; however, some purchases of note were on the shortened week's ledger. Investors who use insider buying to create a list of potential ideas could consider names such as Air Products & Chemicals Inc. (APD), Callaway Golf Co. (ELY), Gevo, Inc. (GEVO), Exact Sciences Corporation (EXAS), and Streamline Health Solutions, Inc. (STRM). All of them caught iStock's attention with multiple purchases or dollar amount.
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For this column, Mead Johnson Nutrition Company (MJN) will be our focus. Last week, CFO, Peter Leemputte purchased 3,000 shares at $63.61 for a total investment of $190,819. Director James Cornelius wrote a check for $617,515 to buy 10,000 shares at $61.75.
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In the past two years, Cornelius made four other purchases. In March or 2011, he bought 10,000 shares at $59.91, another 10,000 at $66.43 in May 2011, 10,000 more in August 2011 at $66.71, and 10,000 more in May 2012 at $81.02. Of the four buys, the director exhibited good timing as the stock climbed to more than $75 following his 2011 buys.
The CFO, on the other hand, has done nothing but exercise options and sell MJN stock in the past 24 months. The number cruncher's buy is more potent in our opinion. After all, who knows a company's finances better than the chief financial officer?
The pair of buys comes on the heels of the stock sinking following from $69.51 to $63.53 following earnings on October 25, 2012. Mead Johnson told the conference call attendees that problems in China while getting better, will lead to a sluggish fourth quarter. Apparently, Leemputte and Cornelius believe the street's reaction was overblown.
iStock thinks investors might be wise to wait before joining forces with the director and CFO. The recent snapback gobbled up 50% of the post-eps selloff. The move is a typical retracement following a big drop. It's been our experience that a test of the low will come before a full recovery takes place.
Overall, we feel Mead Johnson Nutrition Company (MJN) will likely have to work through its China issue during the fourth quarter for Wall Street to become believers again. Fundamentally, iStock feels MJN could still be overvalued with a forward P/E of $19.44 while analysts call for 11.2% eps growth in 2013. And that's if bloated 3rd quarter inventory doesn't put additional pressure on margins and shrink profits.
With that in mind, shareholders might think about writing covered calls now, or a bullish spread if shares flirt with $62. Traders buy and sell call options with the same expiration month to execute a bullish option spread. For example, buying the January 2013 60 call and selling the January 13 65 call. In our view, the spread trade would be a safer way to follow MJN insider's lead.