Insider Monkey tracks quarterly 13F filings from hundreds of hedge funds, including billionaire Dan Loeb’s Third Point. We’ve found that these filings can be useful for investors in a number of ways- for example, the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy) and our own portfolio based on these findings outperformed the S&P 500 by 33 percentage points in the last 11 months.
We also maintain a database of insider trading activity, having observed that studies tend to show a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading). While investors can’t buy every insider purchasing opportunity, we can treat common picks between insiders and a manager such as Loeb similarly to a stock screen and take a brief look at these names to see if any look interesting. Read on for our quick take on five stocks which at least one insider has bought in the last three months and which Third Point reported owning at the end of June (or see Loeb’s stock picks over time).
Third Point owned 1.7 million shares of Tiffany & Co. (NYSE:TIF) at the end of June; we had recorded a company officer buying the stock in the later part of that month. Markets are giving the jewelry retailer a premium valuation, with trailing and forward P/Es of 25 and 20 respectively. While sales were up nicely in the second quarter of 2013 versus a year earlier, Tiffany & Co. (NYSE:TIF)’s margins came down with the result being an only 3% rise in net income. In addition, many investors might see the stock’s dependence on discretionary spending by upper middle class and upper class consumers as a potential risk factor.
Dollar General Corp. (NYSE:DG) was another of Loeb’s picks which had an insider buying the stock within the last few months. Many dollar stores are quite defensive picks, in contrast to Tiffany, and Dollar General is no exception with a beta of only 0.1. However, even as dollar stores begin experiencing slower growth as they increase in size- in its most recent quarter the company’s earnings grew only 3% compared to the same period in the previous fiscal year- they remain priced at a premium to other discount retailers. Specifically, Dollar General Corp. (NYSE:DG) is valued at 19 times trailing earnings and so we might prefer to look at competitors.
Between April and June, the fund initiated a position in Marathon Petroleum Corp (NYSE:MPC), which was spun out from Marathon Oil Corporation (NYSE:MRO) to focus on midstream and downstream operations. Markets are generally negative on refining and marketing, and so the pure-plays in this industry- including Marathon- tend to trade at less than 10 times earnings. Even with the company struggling in terms of its margins and posting a beta of 2.8, it and its peers might be worth a look at that valuation. Billionaire David Shaw’s hedge fund D.E. Shaw disclosed ownership of 3.5 million shares of Marathon Petroleum Corp (NYSE:MPC) in its own 13F (find D.E. Shaw’s favorite stocks).
In June, an insider at $3.4 billion market cap industrial and electrical equipment manufacturer WESCO International, Inc. (NYSE:WCC) bought 2,700 shares of stock; Third Point’s most recent 13F reveals a stake of 1.1 million shares. Last quarter the company experienced double-digit growth rates on both top and bottom lines compared to the second quarter of 2012. With the company valued at 16 times trailing earnings, it could be a prospective “growth at a reasonable price” pick as long as growth remains at a moderate level going forward. As such it could be another target for further research.
Disclosure: I own no shares of any stocks mentioned in this article.
