This Insider Has Good Timing

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What a paltry week for insider buying, one of the lightest we can remember in a long, long time. The skinny list didn’t provide many choices for this week’s highlighted insider buy. We could only find one company that we’d consider based on our 3CP criteria (change of heart, cluster, commitment, and past performance).

SMART Global Holdings, Inc. (SGH) Chief Executive Officer (CEO) Mark Adams meets the P criteria. Adams first started trading SGH in October 2020, buying 9,820 shares at $25.99. He switched sides and sold 7,223 shares in January 2022 at $59.83. That’s a profit of $33.84 per share or 130% in 15 months. Last week, the CEO switched sides again and bought 10,000 shares at $18.10. (1)

In Adams’ limited trading history, he bought and the stock went higher, sold and then the stock went lower. That meets our P definition of past performance.

SMART Global Holdings, Inc. designs and manufactures specialty solutions for the computing, memory, and LED markets. The company offers dynamic random access memory modules, Penguin Computing, LED Solutions and sells its products directly to original equipment manufacturers, enterprise, government and other end customers through direct sales force, e-commerce, customer service representatives, on-site field application engineers, independent sales representatives, distributors, integrators, and resellers.

SMART’s stock left investors smarting after reporting better than expected sales and profit, but disappointed Wall Street with its fourth quarter guidance. Management said Q4 revenue will be in the range of $420 to $460 million, much lower than the consensus outlook of $478.77 million. The bottom-line number was reduced by management too. The street forecast was $0.84 for the fourth quarter and management told investors to expect earnings per share (EPS) in the range of $0.55 to $0.75.

SGH closed at $20.28 on June 29th, earnings were released after the close of trading, shares opened at $17.60 and closed at $16.37 on June 30th. Since, SMART Global Holdings shares have recovered most of the losses with Wall Street posting a one-year price target of $33.83 (3).

To hit $33.83, SGH needs to trade at 10.73 times 2023’s consensus EPS estimate of $3.15. That’s in line with SMART’s peer group’s average price-to-earnings ratio of 10.20. Meanwhile, during the last five years, SGH traded with an average P/E of 12.13, went as low as 3.47, and topped at 26.17.

Using the current 2023 consensus EPS of $3.15 with the four P/E mentioned above, we get the following possible price targets:

Industry Average P/E: $32.13

SGH average P/E: $38.21

SGH low P/E: $10.93

SGH high P/E: $82.44

SMART Global Holdings trades at $19.62 as we type.

OVERALL: We are not the biggest fans of companies that are expected to see earnings fall year over year. As we mentioned, SMART Global Holdings, Inc. (SGH) 2023’s consensus estimate is $3.15 compared to $3.47 this year. It’s also been our experience that bad news tends to be followed by more bad news before turning around. However, considering CEO Mark Adams’ record of being on the right side of the trade, investors might consider adding SGH to their watchlist.

With a five-year Beta of 1.34, SGH is only appropriate for aggressive investors with a time horizon of at least 12-18 months.


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