Although insider buying is a great way to identify companies that might be good investments for the next 12-18 months, we’d be very cautious about entering any new ideas right now. The indexes are getting more negative by the day and could become more volatile to the downside if things get just a little bit worse.
For example, the cross of death appeared on the NASDAQ’s chart last week. Scary name for sure. It’s when the 50-day moving average crosses from above the 200-day average to below the longer-term benchmark. It’s not a guarantee that stocks are going to head south, but the bearish technical signal didn’t get the ominous name for nothing.
Instead of cliff diving headfirst into a swift moving river, swollen by major rainfall (raging rivers are powerful and deadly), investors might consider compiling a list of insider-buying names that look like good buys today, but could prove to be great buys if the market gets monkey-hammered by the cross of death.
2U, Inc. (TWOU) might be one to add to your list. TWOU claims to be a global leader in education technology, a trusted partner and brand steward of great universities. They build, deliver, and support digital and in-person educational offerings, including graduate degrees, undergraduate degrees, professional certificates, boot camps, and short courses.
A quarter of insiders bought big chunks of TWOU stock. Chief Executive Officer (CEO) Christopher Paucek’s quarter-million-dollar buy was the smallest of the four. Chief Operating Officer (COO) Mark Chernis invested $403,886 and Director Gregory Peters spent $500,106. While those all count as what we call commitment buys ($100,000), Director Paul Maeder went double comma, spending $1,037,300. (1)
The buys came on the heels of 2U getting rocked. Wall Street smushed TWOU stock after the company released its fourth-quarter results, telling shareholders to expect widening losses in 2022. (2) Shares got, pa, pa, pa, popped as a result of the unwelcomed news, face diving from February 9th closing price to as low as $8.63 on the 11th. Ouch, that’ll leave a mark.
Insiders stepped in as investors panicked and stepped out, make that fled out of 2U stock. Usually, from our experience, it’s been a good sign when insiders react almost immediately to a selloff following bad news. We read that as insiders viewing the fall as an overreaction and an opportunity. If management also viewed the news as bad or that things were going to get worse, it’s our opinion anybody would throw a million dollars at it like Director Maeder.
However, it is possible the quartet only considered 2U’s prospects and not the overall condition/health of the market. The Education and Training Services company’s shares might truly be undervalued at the current price, $9.64 as type. In fact, TWOU is as low as it’s ever been since debuting in March 2014. However, if the overall market dips another 10% or more, the sinking tide will most likely take 2U and most other stocks lower as well.
As it stands today, Wall Street has a one-year price target of $24.09 on 2U shares. (3) That’s plenty of upside from the current price. Analysts forecast the company to grow sales close to 13% for this year and next, hitting a consensus $1.21 billion in 2023.
Thanks to the recent tank, TWOU is valued at 0.87 times sales (P/S). Whereas, the average company in the same space gets a price-to-sales ratio of 2.5. Prior to the recent crash, 1.14 was TWOU’s lowest P/S ratio while averaging 6.7 times sales since IPOing.
Some quick, back of the napkin math tells us that 2U shares would trade at $18.21 with a P/S ratio of 1.14 and hitting the street’s 2023 revenue consensus of $1.21 billion. If it continues to maintain its current depressed valuation of less than one times sales, then shares would trade at $11.98 on 2023’s revenue projections.
OVERALL: It appears the quarter of chunk buying 2U, Inc. (TWOU) insiders see value in the education stock. However, the overall market could be in for some downside, which would likely carry TWOU lower.
Investors interested in 2U might considering cost averaging their way into TWOU, adding some now and more should stocks take a dip. TWOU is only appropriate for high-risk investors with a 18-24 month time horizon.
1 – https://www.secform4.com/insider-trading/1459417.htm
2 – https://www.fool.com/investing/2022/02/11/why-2u-stock-plunged-43-this-week/
3 – https://finance.yahoo.com/quote/TWOU?p=TWOU
