Insiders Are Buying These 3 Stocks

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

According to section 16 of the SEC, a company's management and any other person who holds more than 10% stake in a company's equity are considered an insider. Transactions by these insiders are not always illegal, but activity is considered illegal if it occurs prior to any important news not yet published.

To make the transaction legal, insiders must file Form 4 with the SEC regarding any change in their holding within two working days.  Now, insiders generally have positions with a long term perspective. That makes the insiders’ transactions important to investors, as they have a deeper knowledge of the industry and the company’s fundamentals.

Lets look at 3 companies in which management has increased its holding by more than 80% over the past six months.  It's like they say, insiders sell stock for many reasons, but they buy for only one.

<table> <thead> <tr><th> <p><strong>Company</strong></p> </th><th> <p><strong>Insiders Holding (>80%)</strong><strong></strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Northrop Grumman <span class="ticker" data-id="204736">(NYSE: <a href="">NOC</a>)</span></strong></p> </td> <td> <p>167.42%<strong></strong></p> </td> </tr> <tr> <td> <p><strong>The Allstate <span class="ticker" data-id="202784">(NYSE: <a href="">ALL</a>)</span></strong></p> </td> <td> <p>92.94%<strong></strong></p> </td> </tr> <tr> <td> <p><strong>American Capital Agency <span class="ticker" data-id="210594">(NASDAQ: <a href="">AGNC</a>)</span></strong></p> </td> <td> <p>87.28%</p> </td> </tr> </tbody> </table>

New contracts

Northrop has had a strong relationship with the U.S. Department of Defense for many years. It recently signed a four-year IT contract of $318 million with the Defense Intelligence Agency, or DIA. Under this contract, the company will develop, design, and integrate enterprise applications.

The Longbow LLC, a joint venture of Northrop and Lockheed Martin, has won a $90.6 million contract in Saudi Arabia. In this contract, it will build Longbow fire control radars, or FCRs, for the AH-64 Apache Attack Helicopter as well as AH-64E Longbow FCRs for the Royal Saudi Land Forces. The Longbow FCR helps Apache aircrew identify the target's location in all weather conditions and thus strengthening its attack ability. Saudi Arabia is one of the leading international clients for the Longbow system, and the joint venture should lead to more orders in the future.

Debt restructuring

Allstate has planned for the restructuring of $1.2 billion senior and subordinate debt maturing notes by issuing preferred shares and low interest bearing debt. It will also redeem $1.8 billion of debt at a premium via a tender offer which means its restructuring $3 billion of its debt.  It will then be able to reduce its annual interest expense by $65 million, which will enhance its operating margin.

To get more premiums, Allstate has adopted more customer oriented strategies. These strategies focus on distribution, pricing, and offer new products and services to its distinct customer segments. By doing this, the company will improve its combined ratio (CR).

Allstate is looking to improve its CR to 88%-90% this year, compared to 95.5% in 2012.  In this case, lower is better, as a CR below 100% indicates the company is making more premium earnings.  Allstate, expects to generate operating revenue of $33.5 billion for 2013 as compared to $32.99 billion in 2012.

Strong dividend

In 2012, American Capital shifted 60% of its loan portfolio to low rate mortgage-backed securities and Home Affordable Refinance program, or HARP, securities in order to earn regular interest on its loans and to reduce its prepayment risk. With this move, the company improved its interest rate spread which is the profit margin for financial institutions. It also reduced its prepayment risk to 9%, compared to 11% in the previous quarter.

With the improvement in the U.S. economy and unemployment data, the Federal Reserve will ease up on its fund easing program, or QE3. With this change, American Capital expects its prepayment risk to be constant. Also, its quarter-over-quarter interest rate spread has dropped to 1.43% from 1.63%.

The Federal Reserve's exit will help the overall industry to gain more spread margin, as a borrower will have fewer opportunities to refinance their loans. But in the case of American Capital, it is reverse, as it grants fixed-rate loans. With the increase in interest rates, its spread is likely to decrease further, as it has already written a bunch of lower interest rate loans.

To counteract this dynamic, the company is using interest rate hedging instruments, which will help it gain from a rise in interest rates. This will neutralize the low spread on its loan portfolio and benefit the company in the long run.

American Capital, with a dividend payout of more than 90%, has declared a dividend of $1.25 per share for the first quarter of 2013, or an annualized dividend of $5.  Its strong cash balance of around $3.3 billion, speaks to its ability to deliver future dividends.  It's also expected to maintain its gaudy dividend of around 18% in coming years.


With a strong relationship with the U.S. Department of Defense, Northrop is expecting future contracts, and Longbow FCRs will help the company continue to grow.  Allstate, with its customer-oriented program, is planning to improve its CR, and its debt restructuring will help it enhance its premium and operating revenue.   American Capital will use interest rate hedging instruments, to neutralize the low spread on pre-existing loans during a rising interest rate environment.  Perhaps the insiders are right, all 3 of these businesses may be strong buys.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.

Madhu Dube has no position in any stocks mentioned. The Motley Fool owns shares of Northrop Grumman. 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!

blog comments powered by Disqus