Insiders buy when Alphatec shares fall. Should you do the same?

Investors often watch insider buying to gauge executive confidence in a company's stock. When executives, board members, or major shareholders buy stock, it indicates that they believe the stock price will rise. This insider optimism can be a positive indicator for other investors.

However, recent insider purchases of Alphatec Holdings (ATEC) shares may be confusing to market participants at first glance. The company's share price has fallen 63.6% since the beginning of the year, slipping into the penny stock category this year.

In addition, the company's latest quarterly results also fell short of expectations and could not stop the decline in the share price.

However, insiders seemed to see a bargain in ATEC following the disappointing results. Shortly after the stock plummeted 34% in a single day following the results announcement, two of the company's directors bought large amounts of Alphatec shares.

About Alphatec's insider purchases

Founded in 1988, Alphatec Holdings (ATEC) is a medical device company focused on the development, manufacture and marketing of spinal implants, surgical instruments and biologics. The company primarily serves spine surgeons and its market capitalization is currently $885 million.

On August 2, a day after the stock's brutal reaction following the earnings release, Alphatec board member David Demski bought 40,000 ATEC shares at $6.56 each, while director Keith Valentine bought 39,000 shares at an average price of $6.55. While Valentine invested $255,451 for the purchase, Demski invested $262,400.

These transactions increased Demski's stake in the company to 0.1698%, while Valentine's stake increased to 0.0585%.

ATEC's new two-year low was reached on August 5, the day after these insider purchases, at $5.74, and last Friday the stock closed just below both purchase prices.

Insights into ATEC’s Q2 results

The current weakness in the company's stock was exacerbated by Alphatec's results for the last quarter, which clearly disappointed market participants. The company reported its 16th consecutive quarterly loss in the second quarter of fiscal 2024. Although losses narrowed to $0.29 per share from $0.43 per share a year ago, this figure was higher than the consensus estimate. In addition, this was the fourth consecutive quarter in which the company's losses were higher than Wall Street estimates.

However, it's not all doom and gloom in ATEC's report, and there are also some positive signs that investors may have missed, according to insiders like Valentine and Demski.

For the June quarter, Alphatec reported revenue of $145.57 million, up 24.5% year over year. This result beat Wall Street estimates by $1.03 million, with a 20% increase in new surgeon onboarding contributing to the overall increase.

The company also increased its full-year revenue forecast to $602 million, up from $601 million previously. Over the past five years, Alphatec has seen an impressive annual growth rate of 40.07%.

Operating margins also improved during the quarter, increasing to 3.8%, compared to a negative margin of 2.7% in the same period last year. The company also expanded its footprint with 244 surgeon training sessions in the second quarter.

In terms of liquidity, Alphatec ended the quarter with cash on hand of $99.8 million, well above its short-term debt of $2.3 million, indicating that there will be no solvency issues in the near future.

Given the solid balance sheet and operational efficiency, analysts forecast Alphatec's future revenue growth of 27.51%, compared to the industry median of 8.85%.

Alphatec's growing market

Alphatec is a major player in the growing spine surgery products market. The industry, valued at approximately $13.3 billion in 2022, is expected to reach $20 billion by 2031, representing a compound annual growth rate of 4.5%. The main drivers of this growth include the rapid development in minimally invasive surgeries and an aging population.

As the fastest growing pure spine surgery specialist in this growth industry, Alphatec is likely to be one of the main beneficiaries of this trend with a market share of 5%.

What do analysts think about ATEC?

Leading brokerage firm Morgan Stanley recently downgraded Alphatec from “Overweight” to “Equal Weight” with a price target of $8 (previously $16).

In a note, the broker said investors “need to see clearer execution of this profitability transition before jumping in.” However, they added in the same breath that Alphatec “deserves recognition for demonstrating the profitability of its product portfolio and delivering significant market share gains.”

Overall, analysts rate ATEC stock as a “Strong Buy,” with an average price target of $18.77. This suggests an upside potential of 197.5% from Friday's closing price. Of the 12 analysts covering the stock, 10 rate it as a “Strong Buy,” 1 as a “Moderate Buy,” and 1 as a “Hold.”

As of the date of publication, Pathikrit Bose had no position (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see Barchart's disclosure policy here.