Major Insider Buying at GNC: A Key Gamble or a Dream?

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GNC Holdings Inc. (NYSE: GNC) has had a very rough and tough 2014, with its shares having lost almost half of their value from its peak at the end of 2013. The first quarter was bad enough, but then in the second quarter the company’s results and guidance sent the stock even lower. Recent changes inside the company are trying to rectify the situation. These include new management, another stock buyback and perhaps most important is fresh news of large insider buying in GNC’s stock.

The board of directors has authorized another multiyear stock buyback plan for up to $500 million worth of common stock. It had previously issued an authorization for the same size of $500 million, and the company had spent approximately $250 million. To put this in context, the market cap of GNC is $3.35 billion. Also note that GNC trades at about only 12 times next year’s earnings expectations.

Following the announcement in November, we started to see a downward trend in share price, going from GNC’s 52-week high of $60.98 ultimately down to a 52-week low of $30.84 in July. So, the company kept buying shares on the way down.

Another key development was the naming of a new chief executive officer, Michael G. Archbold, and nonexecutive chairman of the board, Michael Hines. At first glance, this tactic of repurchasing shares does not seem all that different from the previous effort. However, a fresh gamble from Hines may signal otherwise.

Hines has only been in the office for about two weeks, and he appears very optimistic about where GNC is headed. He has purchased about $1 million worth of GNC’s common stock. Insider purchases of this size would seemingly not happen without at least some significant logic behind the action. The formal purchase on a volume weighted average price (VWAP) was 30,000 shares at a price of $35.4144, for a total purchase price of $1.062 million.

We have shown over and over that insiders sell stock for myriad reasons. It does not only mean insiders feel that the stock is going to drop. Conversely, when insiders buy shares in such a large dollar amount, they are likely trying to communicate one of two things to the market, that the stock is undervalued or that they think the stock will rise.

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Since the announcement in mid-August, we have seen the share price rise to just above $38, after a recent low of $30.89. GNC’s 52-week range is $30.84 to $60.98, and its consensus analyst price target is $42.25.

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