Reading the Tea Leaves: Conviction with Large Insider Buying
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the broader indices continuing to reach new multi-year highs here in March, bulls and bears alike are providing an abundance of opinions on where the market is heading next. The Dow Jones Industrial Average reached three successive all-time highs during the week of March 4, and the S&P 500 is approaching multi-year highs as well.
Truth be told, timing the market is a difficult task, and one that very few people have done with consistent success. I dedicate my own personal time to finding individual company-specific stories where I believe the most money can be made. In particular, a compelling fundamental story combined with recent insider buying often translates into a formula for investing success.
An insider can be defined as any officer or director of a publicly traded company. While there are multiple reasons for insiders to sell, insider buying takes place for only one reason: conviction that a stock price is going higher.
Here are three large insider purchases that caught my eye in recent days:
Cheesecake Factory (NASDAQ: CAKE)
The $1.9 billion Cheesecake Factory operates 177 full-service, casual dining restaurants across the U.S. including 162 of which operate under the namesake brand.
On Feb. 20, Cheesecake Factory released Q4 earnings of $0.51 per share, lower than analysts’ $0.52 estimate. Revenue came in at $464.7 million, within close distance to consensus of $468.5 million.
Despite the minor earnings and revenue shortfall, same-store sales increased 0.9% at Cheesecake Factory and Grand Lux Cafe locations. Excluding the impact of Hurricane Sandy, comparable sales actually increased 1.5% during the calendar fourth quarter.
In other news, management announced a licensing agreement with a Latin American restaurant operator to open a minimum of 8 restaurants over a 12-year period. The first restaurant is opening in Mexico City by early 2014. Here in the United States, management plans to open between 8 and 10 new restaurants this year.
Business appears to be strong at Cheesecake Factory, and recent insider purchases support the optimism. Board member Herbert Simon, chairman of real estate giant Simon Property Group, purchased 20,000 shares of stock at approximately $34.92 per share. The total transaction value amounted to $698,000 when the stock was bought on March 1.
Board member David B. Pittaway also purchased 1,000 shares of stock on March 1, bringing the total for insider purchases to 21,000 shares. Pittaway is a managing director at a New York based private equity firm.
In reference to the restaurant industry as a whole, management has also stated they expect food inflation to increase between 3% and 5% during the fiscal 2013 year.
LogMeIn (NASDAQ: LOGM)
LogMeIn provides web-based services for remote computer access, device management, customer service, and collaboration to both consumers and small and medium-size businesses (description from company website).
On Feb. 14, LogMeIn fourth quarter earnings-per-share and revenue that beat analysts’ expectations. The company earned $0.24 per share vs. $0.18 consensus, while revenue came in at $37 million vs. an estimated $36.7 million. However, shares got crushed in the after-hours session when management announced a first quarter 2013 guidance cut.
LogMeIn provided guidance of $0.09 to $0.10 per share for Q1, compared to a forecasted $0.18. Shares fell precipitously on the news, closing at $23.66 on Feb. 14 and falling nearly 30% to $16.65 the following day. A series of analyst downgrades from Wall Street firms also contributed to the downside pressure.
Chairman and CEO Michael Simon recently stepped in and took advantage of the market sell-off. Mr. Simon purchased 19,900 shares of LogMeIn on the open market when the stock was trading for $17.74 per share. The total transaction value amounted to $353,000 when shares were bought on Feb. 27.
Simon has been in at the helm since he co-founded the company back in 2003. Despite the recent painful sell-off, Wall Street believes that LogMeIn may see a rebound in the second half of 2013. The recent insider buying by Simon supports this belief in my opinion.
In other news, online file storage tool Dropbox is rumored to be planning an IPO during the latter part of 2013. Analysts estimate the size of the IPO to be around $4 billion.
Murphy Oil (NYSE: MUR)
This oil and gas E&P company came to the forefront last October when activist investor Daniel Loeb disclosed he had purchased a significant stake. In a letter to the company’s board of directors, Loeb outlined a four-point plan that he advocated would increase the value of Murphy Oil’s business and therefore the stock price.
On Oct. 4, Murphy Oil filed a press release on its website in response to Dan Loeb’s Third Point Capital. A section of the letter reads, “The Board and management have been working to evaluate opportunities to illuminate the value in our stock price for the benefit of all of our shareholders,” said Claiborne Deming, Chairman of the Board.”
Shortly afterward, Murphy Oil announced a $2.50 special dividend, a $1 billion share buyback program, and announced the separation of its downstream business into a separate company. Shares rose nicely on the news.
Claiborne Deming is the insider who recently purchased $1.2 million of Murphy Oil stock. The chairman purchased 20,000 shares of stock on the open market for approximately $60.86 per share, and the total transaction value amounted to $1,217,200 when the stock was bought on Feb. 27.
Deming served as president and CEO of the El Dorado, Ark.-based Murphy Oil from October 1994 through December 2008.
On Feb. 14, analysts at Oppenheimer & Co. raised their price target on Murphy Oil to $75 from a previous $65 based on the company’s strong Jan. 30 earnings report. Third Point Capital disclosed that it had increased its stake in Murphy Oil with the firm’s 13F regulatory filing on the same date.
A $75 price target from Oppenheimer reflects more than 23% upside from the purchase price of Mr. Deming’s stock at $60.86.
Foolish Bottom Line
Despite the broader market reaching multi-year highs, I believe readers will do well to follow in the footsteps of insiders at Cheesecake Factory, LogMeIn, and Murphy Oil.
Feel free to express your opinion on these stocks or ask a follow-up question in the comments section below.
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