Insiders Are Bullish About These Stocks

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According to our review of studies on insider trading, stocks bought by insiders tend to narrowly outperform the market.

We think that this is because company insiders, by buying stock, are increasing their company-specific risk rather than diversifying their wealth- something that economic theory suggests should only occur when they are particularly confident in the business’s prospects. While it’s impossible to imitate every insider purchase, it can be useful for investors to treat these purchases similarly to a stock screen by briefly reviewing the companies involved and deciding if they are worthy of further research. Read on for our quick take on five stocks insiders have bought recently.

Consumer stocks

A member of the Board of Directors at Abercrombie & Fitch (NYSE: ANF) was buying its stock in late June at prices of about $44 per share. The apparel retailer is valued at 16 times trailing earnings (P/E), in line with the valuations of peers such as American Eagle and Gap. While its fiscal first quarter (Q1) is generally one of the less important quarters of the fiscal year, we’d still be concerned that the company’s revenue declined per its recent report with same-store sales down over 10%.

In addition to insider trading activity, we track quarterly 13F filings from hundreds of hedge funds as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year). We can see from our database that billionaire Steve Cohen’s SAC Capital Advisors owned 2.3 million shares of Abercombie & Fitch at the end of March (find Cohen's favorite stocks).

A trust connected to an insider at Brown-Forman (NYSE: BF-B) bought over 5,000 shares of the stock between late June and early July. Possibly due to the stock’s defensive nature (its beta is 0.5), markets are assigning high earnings multiples to the owner of Jack Daniels, Southern Comfort, and other alcoholic beverage brands; for example, the forward P/E is 21. The fourth quarter of Brown-Forman’s fiscal year ended in April, with revenue up close to 10% versus a year earlier and net income rising as well, though we’re still not sure it’s a good buy at these prices.

Thomas Rogers, CEO of TiVo (NASDAQ: TIVO) bought 10,000 shares on July 1st at an average price of $11.14 per share. This purchase came after TiVo had a terrible June as the markets were disappointed by the small magnitude of its settlement with companies such as Google and Time Warner Cable. In terms of its fundamental business TiVo looks like a dicey proposition: consensus analyst forecasts have the company losing money this year and then only earning 5 cents per share in the fiscal year ending in January 2015.

Two more stocks insiders are buying

Lennar (NYSE: LEN), the $6.8 billion market cap homebuilder, is another stock where we’ve recently recorded insider buying activity. Thanks to a strong housing market, its last fiscal quarter showed a 53% increase in revenue from its levels a year ago with pretax income more than tripling. With trailing and forward P/Es of 19 and 13, respectively, markets are pricing in some future growth but analyst expectations may be suggesting that there is some further upside in the stock. Per the most recent data 22% of the float is held short.

Rounding out our list is farm equipment manufacturer AGCO (NYSE: AGCO), which a business connected to a member of the company’s Board of Directors has been buying for some time. AGCO trades at only 10 times its trailing earnings, though recent financial results have been mixed: its last quarterly report disclosed a small decline in net income compared to the first quarter of 2012 despite a 6% rise on the top line. With many other agriculture related companies in value territory it may be worthwhile to compare AGCO to its peers.

Conclusion

AGCO along with some similar companies could be a good value prospect, but we’re generally not too excited about the rest of these insider picks.

TiVo seems dependent on some sort of special event emerging, and both Brown-Forman and Abercrombie & Fitch don’t look too cheap in terms of their recent performance. Lennar is somewhat interesting, but we’d have to look into how sustainable its recent high growth might be and also be convinced that buying a home builder in the current environment is a worthwhile risk.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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