$2 Million in Insider Buying at 3 Large Companies
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One of my weekly rituals is to study insider activity through the SEC’s Form 4 filings.
Corporate executives and board members (“insiders”) are required to fully disclose their stock purchases pursuant to the Securities Exchange Act of 1934 and the Investment Company Act of 1940.
Whether you are taking a sector view or considering investment in a single company, learning to read the SEC filings can be a powerful resource and strengthen your overall investment thesis.
Here are three large insider purchases ($2 million in total) that caught my eye in recent days:
Lennar (NYSE: LEN) builds affordable, move-up, and retirement homes in Florida and throughout the United States. Shares of the Miami, FL, based company have fallen 12% year-to-date as the high valuations within the homebuilding sector have undergone a healthy correction.
Back on June 25, Lennar reported second-quarter earnings of $0.61 per share, nearly double the $0.33 expected by investors. Author’s Note: The $0.61 figure includes a one-time $0.18 profit from a deferred tax asset valuation; exclude this and the company earned a more reasonable $0.43 per share.
On a fundamental basis, revenue of $1.43 billion exceeded the $1.33 billion consensus. Home deliveries rose 39% year-over-year, with 4,464 homes delivered during the March 1-May 31 period. The company maintains an impressive backlog of 6,163 homes, a backlog dollar value of $1.9 billion for long-term investors.
Following the Q2 earnings report, board member Jeffrey Sonnenfeld purchased 3,345 shares of Lennar for $37.41 per share. The transaction value exceeded $125,000 when the stock was bought on June 27. Sonnenfeld is a senior dean and professor at the Yale School of Management in New Haven, CT. He previously served as a full tenured professor at Emory University and Harvard University for two decades.
While the homebuilding sector is expensive overall, Lennar trades at a reasonable 18x price-to-earnings. Furthermore, the company’s gross margin should expand in the second half of 2013 based on a strong backlog and increased efficiency. I recommend Lennar with a $48 price target in twelve months.
Management consulting firm
The $50 billion Accenture (NYSE: ACN) staged an impressive rally in 2013 before the company mis-stepped at the end of June. Shares advanced 20.6% through June 27, handily outpacing the S&P 500’s return of 13.1% during the same time period.
Management reported Q3 earnings on June 27 after the market closed and provided a disappointing outlook. Accenture reduced its full-year earnings view to $4.18-$4.22 from a previous $4.24-$4.32. In particular, Q4 revenue guidance has been cut to $6.7 billion to $7 billion from Wall Street’s $7.36 billion estimate.
Shares of Accenture fell a massive $10 on the news, causing the stock to lose 12.5% of its market value in a single trading session. Accenture CEO Stephen Rohleder stepped in following the brutal sell-off, buying 20,000 shares of his company’s stock for $71.99 per share.
The $1.44 million purchase is one of the largest buys from a corporate insider. Accenture is a leader in the management consulting industry, and the company is a natural play on the globalization of business activity. Shares trade at a reasonable 15x price-to-earnings, a discounted valuation which doesn’t reflect its full growth potential.
Readers might consider following Accenture’s CEO and buying the stock at current levels. Despite the recent hiccup, I believe Accenture will continue to outperform the S&P 500 over the long-term.
Specialty fashion retailer
Shares of Abercrombie & Fitch (NYSE: ANF) rallied with the broader market to reach a 52-week high of $55.23 on May 23, preceding its first quarter 2013 earnings report.
The following morning, Abercrombie & Fitch announced disappointing Q1 earnings results. The report was unsatisfactory in nearly every aspect. It posted a net loss of $0.09 per share, much wider than the $0.05 loss anticipated by Wall Street. Revenue for the Feb. 3-May 4, 2013 period reached $833.8 million, a shortfall of more than $100 million from the $941.66 million expected by investors. Finally, comparable sales fell 17% during the quarter compared to the year-ago period.
Investors reacted to the news by hitting the “sell” button, causing Abercrombie & Fitch shares to reach the lowest price since November 2012. Abercrombie has struggled in recent years to post consistent operating results, as the company’s target audience loses preference for the brand in favor of competitors such as American Eagle Outfitters, The Gap, and Urban Outfitters.
Abercrombie board member Craig Stapleton stepped in following the sell-off and bought 10,000 shares for $44.02 per share. The transaction value amounted to $440,000 when the stock was purchased on June 25.
Despite recent insider buying, I can’t gather enough conviction to recommend Abercrombie & Fitch. The company’s operating results have been too inconsistent in recent years to warrant a recommendation.
While there are numerous reasons for corporate executives to sell, insider buying takes place for only one reason.
Readers might consider buying Accenture and Lennar based on strong long-term fundamentals. Both stocks are likely to rebound in my opinion.
Despite the insider buying at Abercrombie & Fitch, I can’t recommend the company based on management’s inconsistent performance. It's not to say the stock can't eventually recover, the company is simply too sporadic for me as a long-term investor.
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