CarMax Insiders Like what their Dashboard Says
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It's hard to tell how fast you're going, unless you're the one driving. The same can be said for company insiders and directors. They know whether their company is speeding along on all cylinders or merely sitting idle.
And just like the dashboard indicators on the cars they sell, the signals that these insiders give us can be just as important. Lately, the insider buying signals at CarMax (NYSE: KMX) have been indicating that they think the stock is undervalued.
It's common for many investors to look at the actions of insiders to judge a company's performance and use it to make investing decisions. But if you do nothing but follow their lead, you're liable to get a similar outcome as a sleazy dealership – a pile of junk and the loss of your hard earned money. Here's why...
Directors and insiders are just as susceptible to market excitement as the next person. But that doesn't mean they're good at investing. Take a look at how many company insiders didn't sell their Facebook shares in the IPO, if you need examples.
So these individuals are just as greedy as the next guy, how does that help us? Simple.
They Have Needs
There are a million reasons why an insider sells, and not all of them point to a company that needs repair. The director could be going through a divorce, have gambling debts, be buying a new home, or have a kid who likes crashing Mercedes. They could receive their salary in stock and need to sell it to make their mortgage payment.
The point is insider sales by themselves aren't a good signal to use to dump a stock.
I'm not saying they are cheapskates, but rather that they, just like us frugal investors, don't like overpaying for what they are buying. So when they are buying, they are sending the signal that they believe their company is undervalued and not going to decline further.
Their Greed is in 5th Gear
While there are as many different reasons to sell a stock as there are tires in landfills, there is only one reason to buy. They believe the price is low and that it will go higher. And what do you know, that's what we want... Who says management and investors have different objectives?
One of the other things we like to see is position relative to the number of shares they own. A director buying 100 shares when they own 2 million doesn't really get us excited. A director buying 20% more shares than they currently own? That's more like it.
And that's also the case for CarMax director Mitchell Steenrod who added 1,000 shares to his portfolio, and Thomas Stemberg who added 2,500 shares or about 8%. Both men picked up stock for $25.09 - $25.28 a share.
CarMax stock has taken a tumble from the highs of $35.17 it hit in March and currently sits around $26.79, which is off its low of $24.90. Our company insiders are already sitting on gains...
CarMax isn't the only auto retailer looking up recently. AutoNation (NYSE: AN) and Penske Automotive Group (NYSE: PAG) have been looking good in the recent market bounce. The difference is that CarMax is almost 24% off its peak. It has more room to run and the insiders seem to agree.
But don't take my word for it.
Just yesterday, the Foolish Seth Jayson gave investors a good read on How Fast Is the Cash at CarMax about CarMax's Cash Conversion Cycle, and why astute investors use it as measure of its profit engines.
AlexanderWissel has no positions in the stocks mentioned above. He would, however, like to apologize to CarMax for drooling on their inventory from time to time.The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.