2 Large-cap Stocks Insiders are Buying
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In order to regulate insider trading, SEC requires corporate insiders to report buying and selling their companies’ stocks within two business days. Some investors take advantages of the information by imitating the insider transactions. In our view, it is always a good starting point to pick which stocks to analyze by focusing on stocks with insider transactions recently, especially those stocks with large insider purchases. In this article, we are going to discuss a few large-cap stocks with insider purchases recently. All companies have at least $5 billion market cap and the insider transactions were reported to SEC over the past week, i.e., from April 16 to April 20.
The Mosaic Company (nyse: MOS): On April 16, Director Emery Koenig purchased 1,000 shares of Mosaic for a total of $50,249, or $50.25 per share. The transaction was disclosed to SEC on April 17. Another Director Nancy Cooper also purchased 100 shares at $50.11 per share on April 16. The stock was closed at $50.48 per share on April 24. However, Mosaic does not seem to be popular among hedge funds. Steven Cohen’s SAC Capital Advisors had $33 million invested in the call options of Mosaic, but the fund also had $2.5 million invested in the put options. Similarly, Ken Griffin’s Citadel Investment Group had $25 million invested in Mosaic puts and $21 million invested in Mosaic calls.
Though hedge funds are not very interested in Mosaic, we recommend the stock as a buy. Mosaic has attractive valuation levels. Its current P/E ratio is 10.98, versus the industry average of 18.35. The main competitor of Mosaic is Potash Corp of Saskatchewan Inc (nyse: POT), whose current P/E ratio is 12.5. Analysts expect Mosaic to make $4.36, $5.31, and $5.86 per share respectively in 2012, 2013, and 2014. Its earnings growth is expected to be about 18% per year over the next few years, versus 15% for Potash Corp. We are especially bullish about the potash segment of Mosaic. Mosaic recently settled a large potash contract in China, which will help to keep the strong potash volume. We also see growing demand for potash over the long term. The demand for crop is growing, which will lead to higher potash application rates. We think Mosaic is prepared to benefit from the demand growth as the company has launched a brownfield expansion program in 2006. The company plans to add more than three million tonnes between 2011 and 2020.
Valhi Inc (nyse: VHI): Director Harold Simmons has been purchasing Valhi shares continuously since February last year. At that time, Valhi was trading at only slightly above $20 per share. The stock is currently trading at $50+ per share and Simmons has obviously made a bundle from his purchases. Over the past week, Simmons disclosed additional purchases of the stock. He bought 1,000 shares of the stock at $53 per share on April 18, 100 shares at $53 on April 20, and 1,900 shares at $53.35 on April 20. Valhi was closed at $53.72 per share on April 24.
In our previous article about insider trading, we recommended investors to purchase Valhi as we believe the company demonstrated robust revenue and earnings growth. The article was published on April 17. That day Valhi was closed at $51.23 per share. Since then, Valhi was up 4.86%, while the S&P 500 index was down 1.28% during the same period. If investors had followed our advice, they could have beaten the market by more than six percentage points in one week. Historically, insider purchases outperformed the market over the long term. Harold Simmons made a long-term bet and he won’t be flipping his shares in one week. Billionaire Jim Simons was also bullish about Valhi. His Renaissance Technologies reported to own $2.6 million worth of Valhi shares at the end of last year.
Overall we are bullish about both stocks. We like Valhi because of Harold Simmons’ track record. We like Mosaic because there was more than one insider purchasing. Historically insiders beat the market by 7 percentage points on the average when there were several insiders purchasing a stock. Mosaic is an inexpensive stock with a lot of upside potential and recent insider purchases give us the confidence to issue a buy recommendation.
This article is written by Guan Wang and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in the article.