Should We Follow These Leaders?

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

Investors are always hard-pressed to find ways to outperform the market averages, as stocks are generally priced at their appropriate price.  However, one screening tool that has proven to be effective in determining whether a stock is moving higher is insider buying, for one simple reason: they buy stocks, just like us, to make more money. In addition, they arguably have the best view of the company, being a part of the day-to-day operations, and may have a large investment of their own that they like to see increase in value. Below are a couple stocks with strong insider buying.

Health care giant UnitedHealth Group (NYSE: UNH) out of Minnesota is simply a giant, with trailing twelve months revenue exceeding $110 billion and a market capitalization in excess of $55 billion. The company has been range-bound the past year with the current stock price virtually in the middle of its $50.32-$60.75 price range. Board director Rodger Lawson seems to think there is more upside ahead, filing an SEC Form 4 on Jan. 22 showing the purchase of 2,000 shares on the open market at $54.42, equating to almost $110,000 worth of stock.

Considerable insider buying is always encouraging, and when we look deeper into the company’s fundamentals the valuations look appealing. Trading at barely half its sales to enterprise value and at a discount to its expected growth rate, while trouncing those estimates in three of the last four quarters, has me thinking that “the Street” is underappreciating UNH. Add in its consistently growing 1.5% dividend yield, which currently stands at a paltry 15% payout ratio, and investors can confidently expect that to continue to be raised in the near future. Competitor Aetna (NYSE: AET) is worth a look as well to potentially split one’s position and take out company-specific risk. The company has similarly attractive valuations, while beating the consensus analyst estimates the past two quarters, displaying that it is currently operating well. Add in its 1.6% dividend yield and paltry 13% payout ratio and one can reasonably believe, like with UNH, that the dividend will be increased here again soon as well.

Diversified software giant Adobe Systems (NASDAQ: ADBE) is most well-known for its Acrobat family of products. Since its founding just over 30 years ago, the company has become a juggernaut with well over $4 billion in annual sales and a market capitalization near $20 billion. The stock is sitting right near its $38.78 52-week high and one would think that now is the time to take some profits. Board director Amy Banse thinks otherwise, buying 5,000 shares on Jan. 16 at $38.06 per share, equating to almost $200,000 worth of stock. The stock operationally has performed well, either meeting or exceeding consensus analysts’ estimates the past four quarters while expecting greater than a 10% per annum growth rate for the next five years. The company does not pay a dividend though, which is discouraging to me, but with approximately $2 billion in net cash and healthy returns on equity exceeding 13%, Adobe is worth a look.

Moreover, fellow software titan Microsoft (NASDAQ: MSFT) is worth putting on the radar as a potential stock to diversify one’s position with Adobe. Their ubiquitous Windows operating system has helped the company achieve annual sales well in excess of $70 billion and a market capitalization of over $230 billion. The company has done well operationally, exceeding consensus analyst estimates in three of the last four quarters while generating great returns on equity in excess of 22.5%. Perhaps most importantly, the company pays a very nice 3.3% dividend, and with just a 43% payout ratio, expect that to continue being raised in the foreseeable future.

Hopefully this gives you a nice starting point in your investment research. I’d like to also say I appreciate you reading my thoughts and reiterate that these are just the views of the blogger and should not serve as a substitute for any professional financial advice or counsel in general. Respectful comments and questions are always welcome below on the comment board.


Wiseinvestors has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems and UnitedHealth Group. The Motley Fool owns shares of Microsoft. 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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