Insider Stock Buys at Firm Studied
Although the last few months have been rough for Comprehensive Care Corp., which recently reported its first yearly earnings decline, recent insider stock purchases may indicate that things will be looking up for the Irvine-based company.
One of the nation’s leading operators of drug and alcohol abuse treatment programs, Comprehensive Care racked up impressive growth for 12 consecutive years. But the company, stuck with too many beds and not enough patients, saw its net earnings for the year ended May 31 fall 24% to $13.1 million. The fourth quarter was even worse, with net earnings plunging 92% to $384,000, largely the result of $5.7 million in write-offs.
The first hint of trouble was in late March, when the company reported that third-quarter earnings were off 12% despite a 23% revenue increase. And things got really hairy in May, when Comprehensive Care announced the layoff of 200 employees.
“It hasn’t been easy,” B. Lee Karns, Comprehensive Care’s chairman, said on May 22, the day the news was released. “But we’re very bullish about our business over the long term.”
Just how bullish was demonstrated the next day, when Comprehensive Care hit a new 12-month low of $13.50 a share on the over-the-counter market. Jack McLeod, a company director since 1971, bought 573 shares at $13.88 each and an additional 1,500 shares at the day’s closing price of $13.75. A few weeks later, Karns himself bought 10,000 shares for his family trust at $13.88 each.
In all, the two purchased 92,573 shares in 11 separate transactions between May 23 and July 24, according to statements filed with the Securities and Exchange Commission. In one transaction, on July 21, McLeod paid $12.63 each for 15,000 shares, less than a point above the stock’s 12-month low of $12 a share.
In an interview Friday, Karns said that he purchased an additional 19,500 shares at about $13 a share on July 30. The stock, he said, was undervalued and therefore a good investment.
“We’ve always been exceptionally sensitive to hold off on buying until after all information is made public,” he said, stressing that the purchases did not begin until after Comprehensive Care disclosed that net earnings for 1986 would be off.
With fiscal 1986 consigned to history, Comprehensive Care officials say they hope the worst is over, although Karns himself won’t make any projections concerning the current year. Still, at least one analyst thinks the stock purchases are strong indicators for the company.
“You like to spot it when the insiders are buying it back,” said Stuart Shinbein, of Indicator Digest, a New Jersey-based stock letter. “Maybe that write-off was a one-time affair indeed.”
Although the stock has rebounded modestly--it closed Friday at $15.125 a share, up 87.5 cents for the week--Larry Selwitz, of Bateman Eichler, Hill Richards Inc., in Los Angeles, believes speculation that Comprehensive Care may be an acquisition target, not expectations of renewed growth, is the reason for the modest recovery.
The recent buying probably is little more than insiders either taking advantage of a cheap buy or hedging their bets in case of a takeover, because significant earnings growth is not likely to occur for another two years, he said.
“The reasons for the weakness haven’t gone away,” Selwitz said. “So it’s hard to see them doing much better this year.”
Because the electronics industry has failed to free itself from the grip of recession--something that had been hoped for in 1986--analyst E. Gray Glass III, of New York-based Kidder, Peabody & Co., has lowered his 1986 earnings estimates for Diceon Electronics.
In a recent report, Glass said that while the Irvine maker of printed circuit boards “remains one of the most attractive small, high-growth companies we cover,” the high-tech slump persists, forcing him to lower Diceon’s estimated earnings for the year ending Sept. 30 to $1.25 a share from an earlier estimate of $1.35 a share.
Based on Diceon’s 5.4 million shares outstanding, that translates to net earnings of $6.8 million, still a healthy 13% above the $1.09 a share, or about $6 million in net operating earnings Diceon posted last year.
For Diceon’s fiscal 1987, Glass estimates earnings of $1.75 a share, down from his earlier estimate of $1.95 a share. If the new 1986 estimates are on target, the 1987 projection would translate to $9.5 million in net earnings, a 40% increase over the anticipated 1986 earnings.
On Friday, Diceon closed on the over the counter market at $19 a share, up 25 cents for the week.
Often, a purchase recommendation issued by a large, well-known brokerage house becomes a self-fulfilling prophecy because of the mad rush of buyers who wind up driving the recommended stock to new highs.
Such was the case last week when the New York investment firm of PaineWebber Mitchell Hutchins touched off a dizzying three-day buying orgy following an analyst’s recommendation Wednesday that investors begin adding ICN Pharmaceuticals Inc. to their portfolios.
Although stock in the Costa Mesa drug maker has been a strong performer this year, largely because investors are betting that ICN’s anti-viral drug, Virazole, eventually will be unleashed against AIDS, ICN shot up $12.375--or 67% of its market value--last week to close Friday at $30.75 a share. Volume for the week was 5.3 million shares, making ICN the New York Stock Exchange’s eighth most active issue last week. ICN has 9.6 million shares outstanding.
Ronald Nordmann, the analyst responsible for the feeding frenzy, said in an interview that although AIDS is a good reason to buy the stock, influenza is a better one. Last winter, he said, 107 million Americans came down with the flu.
“Unfortunately, too much of the trading has been based on Virazole as an AIDS treatment. I think the market for influenza is much bigger,” Nordmann said. “I would see it as an influenza play before I would see it as an AIDS play.”
Virazole is being used in clinical trials involving 350 pre-AIDS patients--people with a series of symptoms that often precede AIDS--at several medical centers around the United States. The drug also is one of several agents being tested as AIDS medications under a $20-million U.S. Public Health Service program.
Although the drug currently is approved domestically solely for treating a rare infant respiratory disease, Nordmann said he expects ICN to file several new drug applications with the Food and Drug Administration by the end of 1987, including applications for its use against AIDS and influenza.
ICN’s two over-the-counter listed subsidiaries, Viratek Inc. and SPI Pharmaceuticals Inc., were also big winners on Wall Street last week.
Viratek, which is 44% owned by ICN, closed Friday at $125 a share, up $29 for the week on weekly volume of 141,200 shares traded. Friday’s close is more than nine times Viratek’s recent 12-month low of $13.75 a share.
Viratek, which has been especially volatile this year, ran up to new highs in early June on unfounded rumors of a take-over attempt by the Eastman Kodak, which owns 5% of ICN and 10% of Viratek. Last week, the company announced that a top Kodak chemist has been named to head Viratek.
SPI gained $3.50 a share last week to close Friday at $37 a share. Volume for the week totaled 313,700 shares. All three companies are engaged in the manufacture and sale of Virazole.
