Fishing in 2 More Ponds Where Insiders Are Buying

We are beginning week 4 of sheltering in place here in Miami. I would not be honest if I didn't say I feel a massive amount of cabin fever. I am sure most of the country is starting to feel the same way. The main epicenter of the outbreak in the U.S. continues to be New York and New Jersey, which have just over half of all confirmed deaths related to Covid-19. It does appear as though confirmed cases are plateauing in the Sunshine State and other parts of the nation, and it appears stocks will get off to a good start this week. My investing game plan remains the same for the new trading week. As I have outlined in recent weeks, I am only putting new money to work in the market using covered calls utilizing near-the-money, long-dated call strikes when the S&P 500 is down at least 3% on the day. During big rally days, I tend to look for some of my covered call positions that are near expiration and still under their strike price to roll the options forward. As a result, most of my options expire near the end of 2020 and early 2021. I hope some normalcy has returned to the markets, economy and nation by then. We are seeing some of the largest insider purchases in the equities markets since the aftermath of the financial crisis. I continue to use insider activity to find new opportunities for my covered call strategy to research. Here are a couple new names on that list. Recently, I put some money into Acadia Pharmaceuticals via near-the-money buy-write orders utilizing the January $40 call strikes. The stock has held up much better than most in the market during the Covid-19 meltdown. Its main asset Nuplazid saw sales ramp up by more than 50% in 2019 to $340 million. The compound was approved in the summer of 2018 by the U.S. Food and Drug Administration (FDA) for the treatment of hallucinations and delusions associated with Parkinson's disease psychosis. During its fourth-quarter conference call in late February, Acadia management guided for $440 million to $470 million of Nuplazid sales in 2020. Acadia also plans to submit a supplemental new drug application (sNDA) for Nuplazid to treat Dementia-Related Psychosis this summer. Approval greatly would expand its potential customer base. Nuplazid is also in late-stage studies for other indications, as outlined in the chart below. Goldman Sachs recently raised its price target for Acadia to $72 from $45 and the company has $700 million in cash on the balance sheet. Noted biotech investors the Baker Brothers have a large stake in the firm and added more than $10 million in new shares in mid-March. Even if the stock does nothing through options expiration, I have lined up a just north of 25% return from this covered call strategy. Then there is HD Supply Holdings HDS, with a market cap of $4.2 billion. Like so many names in the market, HD Supply's stock has been crushed by the sharp, sudden and unprecedented contraction in economic activity. The decline has triggered a beneficial owner to add substantially to his core stake in the company, purchasing about $7 million in additional shares so far in April. It is also only the second time an insider has purchased shares in HDS since 2016. HD Supply has announced that it is postponing the planned separation of its Facilities Maintenance and Construction & Industrial units. This split eventually will take place, but this move should help concentrate management's focus on the current challenges. HD Supply posted a fourth-quarter earnings beat in March and earned more than $3.50 a share in the last fiscal year, which ended Feb. 2. HD Supply has withdrawn guidance for the current fiscal year due to the Covid-19 outbreak and it is going to have a couple rough quarters. HD Supply's debt is more than manageable and the company had more than $160 million in free cash flow in the fourth quarter. On the stock's next significant down day I plan to open a new position in HDS via covered calls using the January $25 call strike, which should produce a return in the low $20s even if the stock does nothing but stay at current levels. Both names can be accumulated here and have bright futures. However, I prefer my covered call game plan on each right now in a still uncertain environment.

Fishing in 2 More Ponds Where Insiders Are Buying

Acadia Pharmaceuticals and HD Supply each have seen significant insider purchases of late.

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