Insiders Are Bullish About These Dow Stocks

By Meena Krishnamsetty - February 3, 2012 | Tickers: AA, KO, DD, HPQ, PG | 0 Comments

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Corporate insiders have an edge over ordinary investors, especially when it comes to purchasing stocks. Insiders understand their companies much better than other investors, and they sometimes have material non-public information. Although trading on such information is prohibited by law, there are still a few insiders trading in the grey area. Nevertheless, even if insiders do not act directly on material non-public information, they can still benefit from the information by postponing their purchases or sales when they know their company is about to release bad or good news. That’s why we have been tracking insiders and recommending investors to imitate their trades.

In this article, we are going to focus on the Dow stocks that insiders bought over the past three months. We like Dow stocks. There are some investors who strictly invest in mega-cap blue chip stocks and most hedge funds have at least one or more Dow stocks in their portfolios.

Among these seven Dow stocks with insider purchases over the past three months, Alcoa Inc (NYSE: AA) and E. I. du Pont de Nemours and Company (NYSE: DD) were bought by insiders during the past month. On January 11, Ratan Tata, director at Alcoa, bought 1985 shares of AA at $9.4169 per share. Now AA is trading at $10.67 per share. Alcoa is an aluminum production company. For the third quarter of 2011, the company reported net income of $172 million, up from $61 million for the same quarter a year ago. AA has a market cap of $11B and a P/E ratio of 19.47. At the end of September, there are 25 hedge funds with AA in their portfolios. For instance, John Paulson’s Paulson & Co had nearly $300 million invested in AA at the end of the third quarter. Alcoa's forward PE ratio is around 18 and Wall Street analysts expect the stock increase its earnings by 10% annually. We think Alcoa is expensive at these levels and there are cheaper basic materials stocks out there. 

DD was also purchased by one insider in January. Director Bertrand Collomb bought 5290 shares of DD at $51.2003 per share on January 26. Today the stock is trading at $51.51 per share. DD has a market cap of $47B and a relatively low P/E ratio of 13.85. DuPont offers a wide range of products and services, including agriculture and food, building and construction, electronics and communications, general industrial and transportation. The company reported annual net income of $3.5 billion for 2011, up from $3.0 billion for 2010. DD is also quite popular among hedge funds. At the end of the third quarter, there were 33 hedge funds disclosed to own DD. For example, Jim Simons’ Renaissance Technologies had $61 million invested in DD at the end of September. DuPont's forward PE is slightly above 12 and the stock is expected to grow its earnings by 9% annually over the next 5 years. We like DuPont because of its valuation and its 3.2% dividend yield. The company doesn't increase its dividends every year, but they don't cut it either. They even kept the dividend constant in early 2009 when the stock price dropped to $16 and dividend yield approached 10%. Current dividend yield is more than 50% higher than 10-year Treasuries and we believe this stock will outperform the 10-year Treasuries over the next 10 years. 

Another Dow stock with insider purchases over the past three months is Hewlett-Packard Company (NYSE: HPQ). It was purchased by one insider in early December. John Hammergren bought 1,000 shares of HPQ stocks at $28.2075 per share on December 2. The stock is now trading at $28.21 per share. HPQ has a market cap of $55B and a low P/E ratio of 8.53. Hewlett-Packard is a company that provides technologies and software solutions to individuals and institutions. For the 12 months ending October 31, 2011, the company reported net income of $7.1 billion on $127 billion total revenue, compared with $8.8 billion net income on $126 billion revenue for the 12 months ending October 31, 2010. HPQ is also quite popular among hedge funds. There were 43 hedge funds with HPQ positions at the end of September. Seth Klarman is the most bullish hedge fund manager about HPQ. His Baupost Group initiated a brand new $466 million of HPQ over the third quarter. John Paulson is also bullish about HPQ. Paulson & Co reported to own $341 million worth of HPQ shares at the end of September. Hewlett Packard is a greater example of out of favor stock. Its forward PE ratio is 7 which is extremely low. Other PC stocks like Dell (DELL) and Apple (AAPL) also have extremely low forward PE ratios despite their huge net cash balances. HPQ is our favorite stock among these Dow stocks with insider purchases.

Other Dow stocks that insiders are bullish about include Boeing Co (BA), Walt Disney Co (DIS), The Coca-Cola Company (NYSE: KO), and Procter & Gamble Co (NYSE: PG). Out of these four names we like Coca-Cola and P&G the most because of their high dividend yields. These are solid stocks that yield more than the 10-year Treasuries and their payout ratios are around 50% or less. According to our past studies, insider purchases outperform the overall market on the average in the following 12-month period. We believe that investors will be more likely to beat the market in the long term simply by focusing on the stocks that insiders are bullish about. 

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