Insiders Have Recently Bought These Stocks
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According to Insider Monkey’s analysis of studies on insider transactions, there is a small outperformance effect for stocks bought by company insiders (read our analysis of studies on insider transactions). This finding is generally attributed to the fact that unless insiders are particularly confident in the company, they will choose to diversify their wealth rather than buy stock and therefore, increase their company-specific risk.
Investors can’t imitate every insider purchase, but it’s possible to think of insider buying similarly to a stock screen: understand that these picks are on average an advantageous “hunting ground” for good picks, look for stocks which might be potential values, and perform more research on these names. Read on for Insider Monkey’s quick take on five stocks which at least one insider has bought recently:
Two consumer stocks
Stefano Pessina’s healthcare and beauty company Alliance Boots has added more shares of Walgreen (NYSE: WAG); Pessina serves as a member of Walgreen’s Board of Directors. The drug store chain managed 16% earnings growth in its most recent quarter (which ended in May, and was the third of its fiscal year) compared to a year ago, though revenue only grew 3% over the same time frame. The stock is up 60% in the last year, though with Wall Street analysts being fairly optimistic about future performance, this has resulted in a valuation of 14 times forward earnings estimates.
Insider Monkey’s database has shown multiple members of the Brown family buying shares -- directly or indirectly -- in Brown-Forman (NYSE: BF-B). The alcoholic beverage company’s fiscal year ended in April, with the 10-K showing growth on both top and bottom lines. However, markets have been quite optimistic about the company’s future, and as a result, Brown-Forman currently trades at 26 times trailing earnings.
In addition to following insider activity, Insider Monkey also tracks quarterly 13F filings from hundreds of hedge funds and other notable investors, using the included information to help develop investment strategies (for example, the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year).
This database can also be used to track interest in individual stocks; billionaire Richard Chilton’s Chilton Investment Company owned about 930,000 shares of Brown-Forman at the end of March (find Chilton's favorite stocks).
Three more stocks insiders like
An Accenture (NYSE: ACN) officer’s family limited partnership bought 20,000 shares in early July at about $72 per share. The IT, consulting, and outsourcing services provider is valued at 17 times earnings, whether one compares the current stock price to trailing earnings or forward consensus from the sell-side.
Business has been more or less stagnant -- the company has been reporting higher earnings per share, but this has primarily been caused by a lower effective tax rate and net benefits from corporate reorganization. Neither one of those factors can be counted on to support EPS growth in the future.
VeriFone Systems (NYSE: PAY), the provider of electronic payment systems, is another stock where there has been insider buying recently. 2013 hasn’t been a good year for VeriFone, as results have come in below expectations and management has lowered guidance as well.
In its most recent quarter, revenue fell 10% compared to the same period in the previous fiscal year; operating income was essentially zero even after adding back special items. Analysts are expecting the next year to be better, with a forward P/E of 12, but investors may not want to depend on VeriFone hitting that target given recent performance.
Dragon Global Holdings, a company related to the CEO of Endurance Specialty (NYSE: ENH), bought about 3,100 shares of the stock on July 11. Endurance Specialty Holdings is a $2.3 billion market cap insurance company specializing in property and casualty insurance and reinsurance.
Its earnings have been up significantly, though digging into the company’s most recent quarterly report, this was due to higher net margins resulting from lower net losses and loss expenses. While the stock is cheap in book terms, the trailing P/E of 16 is a bit outside value territory.
Many of these stocks seeing insider buying recently actually don’t look too appealing at first glance. Brown-Forman looks quite pricey as far as its trailing earnings multiple is concerned, and so, even though the business has been growing nicely, it doesn’t seem that interesting.
VeriFone is struggling, according to its reports, and investors should wait for a reversal of fortune before considering it. The other three stocks covered here aren’t trading at enormously high valuations, but in each case, recent earnings growth has been rooted in expanding net margins and so, it is unclear that they will be able to improve enough going forward to justify current valuations.
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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 recommends Accenture and Endurance Specialty. 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!