Insiders are Buying these Stocks
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For ordinary investors, following the smartest investors in the world is always a good strategy to develop investment ideas. But who are smart investors? In our opinion, corporate insiders are more knowledgeable about their own companies and their respective industries, making them amongst the smartest investors in the world, at least when it comes to their own companies. By focusing on insider transactions, especially large insider purchases, ordinary investors are more likely to outperform the market over the long term. Let’s check out what insiders are buying recently. All companies listed here have market capitalizations over $10 billion and had significant insider purchases reported to SEC from June 4 to June 8.
Hewlett-Packard (NYSE: HPQ): In a previous article, we mentioned that Director Ralph Whitworth reported on May 30 that he had bought $295 million worth of HP shares. Over the past week, Whitworth reported an additional purchase of 5,051,265 shares of HP stock for a total of $112 million, or an average of $22.20 per share. Another director, Raymond Lane, reported to SEC on June 4 that he has purchased 179,900 HP shares for a total of $4 million, or an average of $22.17 per share. HP is now trading at $21.72 per share.
Though HP’s first-quarter results were a bit disappointing, the strong recent insider interests in the stock indicates some form of perceived value. A number of hedge funds also see value in HP. As of March 31, there were 47 hedge funds disclosed to own HP in their 13F portfolios. Big names include Seth Klarman, Ray Dalio, and Steven Cohen (see Steven Cohen’s favorite stock picks). We think HP is a good option for long-term investment. Its current P/E ratio is low at 8. Wall Street analysts expect its EPS to be $4.06 this year and $4.41 next year, which means its 2013 P/E ratio is lower than 5.
Ecolab Inc (NYSE: ECL): William Gates, a large shareholder of Ecolab, purchased over 900,000 shares of the stock over three consecutive trading days. Gates bought 383,656 shares at $61.8359 per share on June 1, 526,707 shares at $61.7922 per share on June 4, and another 8,683 shares at $61.9917 per share on June 5. Now Ecolab is priced at $66.02 per share. A few hedge fund managers are also in favor of the company. Boykin Curry was the most bullish hedge fund manager about Ecolab amongst those we track. His Eagle Capital Management had over $500 million invested in this position at the end of the first quarter (check out Boykin Curry’s top stock picks). Cliff Asness, John Burbank, Israel Englander, and Tom Gayner are also bullish about Ecolab.
For the first quarter of 2012, Ecolab reported total revenue of $2.81 billion, up 85.1% from $1.52 billion for the same quarter last year, largely beating the industry average revenue growth rate of only 2.0%. However, Ecolab also incurred higher expenses and the overall effect was a lower EPS. In fact, the company has displayed a downward EPS trend over the past few years. Over the past fiscal year, Ecolab reported EPS of $1.92, versus $2.24 in the prior year. On the positive side, this negative trend is expected to be reversed. Analysts expect Ecolab to earn $3.01 per share this year and $3.57 per share next year.
Another piece of good news is that Ecolab has been generating healthy cash flows. Its net operating cash flow was $110.50 million for the first quarter this year, up 96.96% from the same period a year ago, versus the industry average cash flow growth rate of 2.2%. This cash flow generation ability is a strong support for the company’s share repurchase program. Ecolab authorized a $1 billion share repurchase program in September last year. Three months later, it announced an accelerated share repurchase program to buy back $500 million worth of its common stocks. The accelerated share repurchase program is expected to be completed by the end of this year, which will help further boost Ecolab’s EPS.
Other companies: Over the past week, insiders also reported purchasing 143,800 shares of VMware Inc (VMW) and 152,807 shares of Valeant Pharmaceuticals International Inc (NYSE: VRX). We have been reporting insider transactions in these two stocks over the past couple of months. EMC Corp (EMC) has been continuously buying VMware and Valueact Holdings LP has been purchasing Valeant. A few other insiders, such as Director Laurence Paul and Ann Norma Provencio, also reported to have bought Valeant recently (check out insider purchases in Valeant). Valeant will probably increase its earnings by more than 30% in 2012 thanks to its aggresive acquisitions and high growth rate in emerging markets. Despite its high growth rate the stock has a 2012 forward PE ratio of 10. Insiders definitely think the stock is undervalued. We believe VRX deserves a PE ratio of at least 13, giving it a 30% upside.
Insiders also showed interest in Microsoft Corp (NASDAQ: MSFT). On June 5, Director Stephen Luczo reported buying 17,500 shares of the company. Microsoft is one of the most popular stocks amongst the hedge funds we track, with over 100 hedge funds owning stock in the company at the end of March (see the 10 most popular stocks). For some reason technology stocks don't get any respect from investors. Microsoft is expected to make more than $3 in 2013, giving it a forward PE ratio of less than 10. One might argue that this is due to the breathtaking growth of Apple (NASDAQ: AAPL) and declining PC sales. However, Apple doesn't have astronomical price multiples either. It is expected to make about $50 in 2013, giving it a forward PE of 12. These low PE ratios are despite the huge cash hoards of these tech companies. Excluding cash, these two companies are ridiculously cheap. Owning both stocks at the same time also seems like a better bet than owning one of the stocks. That way we don't really have to bet on the future of the PC industry, we will come out ahead no matter what happens.
This article is written by Guan Wang and edited by Meena Krishnamsetty. Meena has long positions in MSFT and AAPL. The Motley Fool owns shares of Ecolab. Motley Fool newsletter services recommend VMware. 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.