An Out Of The Blue Insider Buy Ready To Bear Fruit?

Stocks staged a comeback last week after flirting with the edge of technical support and potential meltdown. However, insiders were not buying it as last week’s activity was as light as we can remember. Nearly a third of the transactions were last minute, end of year reports for trades that happened much earlier in 2022. It’s too late to consider stale purchases beyond their expiration dates.

Unlike Old Mother Hubbard, the cupboard wasn’t bare, and one insider threw us a bone.

Comtech Telecommunications Corp. (CMTL) Chairman, President, and Chief Executive Officer (CEO) Ken Peterman bought 44,000 shares of the Communications Equipment company for an investment of $560,945. (1)

Comtech is a leading global technology company providing terrestrial and wireless network solutions, next-generation 9-1-1 emergency services, satellite and space communications technologies, and clouded native solutions to commercial and government customers around the world.

Last week’s purchases were the first for the CEO. In fact, Peterman’s only other insider history is limited to options-related trades or selling more than $5.5 million of Viasat, Inc. (VSAT), where he served as President of Government Systems and Senior Vice President. Peterman joined CMTL’s board in May 2022 before being named President and CEO on August 10, 2022. (2)

When a habitual seller becomes a buyer, we call that a change of heart. But, we usually limit it to sentiment switches when buying and selling the same company’s stock. We’ll deem it an out of the blue buy and refer to what ex-superstar mutual fund manager Peter Lynch said regarding insider buying, “insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.” (3)

According to Wall Street’s consensus one-year price target of $15.40, analysts forecast a potential rise of a little more than 14 percent from Comtech Telecommunications’ current price of $13.48. In the past 52 weeks, the stock traded between $8.42 and $22.84.

As of now, CMTL pays an annual dividend of $0.40 for a yield of 3.05%. In our opinion, the dividend could be at risk as the Street believes the tech company will turn a profit in 2023 or 2024 with consensus losses of $0.62 per share this year and $0.80 next year. Meanwhile, revenue is expected to increase by double digits, from $486.24 million in 2022 to $531.68 million in 2023. (4)

Since earnings per share (EPS) are predicted to be underwater for the foreseeable future, we’ll use the top line to create potential price targets and a price to sales (P/S) basis. CEO Peterman may have seen value compared to his peers since CMTL trades at 0.70 times sales while the average peer is valued at more than four times higher at 2.7 times sales. That’s a big difference but don’t expect Comtech to close the gap by much.

In the last five years, CMTL traded with an average P/S ratio of 0.97 and maxed out at 1.52 with a low of 0.44. If Peterman and company meet the Street’s consensus 2023 sales target of $531.68 million, it creates the following possibilities based on its recent price to sales history.

Low P/E: $8.42

Average P/E: $18.54

Max P/S: $29.09

Overall: Comtech Telecommunications Corp. (CMTL) offers roughly a one-to-one reward to risk relationship using the five-year low and average price to sales ratios. That’s not the minimum number of two to one that we look for.

CEO Peterman has been on the job for about 18 months and our GUESS is that some of his initiatives could be ready to blossom. It would not be surprising to see relationships he developed as President of Government Systems at Viasat, Inc. (VSAT) begin to bear fruit for CMTL. New business could shift expectations for profitability and stronger sales than currently forecasted. To reiterate, it’s just a guess on our part based on experience.

CMTL is only appropriate for investors with above-average risk tolerance and at least a 24-month time horizon.

 

1 – https://www.secform4.com/insider-trading/1575173.htm

2 – https://www.comtechtel.com/news-releases/news-release-details/comtech-appoints-ken-peterman-president-and-chief-executive

3 – https://www.investopedia.com/articles/02/061202.asp

4 – https://finance.yahoo.com/quote/CMTL/analysis?p=CMTL