Economic theory suggests that insiders should generally only buy the company’s stock if they are particularly confident in the business’s prospects, preferring to diversify their wealth in other cases, and studies do in fact show a small outperformance effect for stocks bought by insiders. Read our analysis of studies on insider trading. In addition to tracking insider trading activity, we also follow quarterly 13F filings from hundreds of hedge funds including Renaissance Technologies, whose founder Jim Simons is now a billionaire. We’ve found that 13Fs can be useful sources of investment information (for example, the most popular small cap stocks among hedge funds tend to outperform the S&P 500 by an average of 18 percentage points per year). As such we like to compare hedge funds’ recent filings to recent insider activity. Here are the five largest holdings in Renaissance’s portfolio as of the end of March which at least one insider has bought in the last three months (or see the full list of stocks the fund reported owning):
At two points in the last three months, an insider at Philip Morris International Inc. (NYSE:PM) has purchased 1,000 shares of the stock; the cigarette company was one of Renaissance’s ten largest holdings at the end of Q1. The 3.7% dividend yield could certainly be appealing, although some other cigarette companies pay higher yields. Business has been stagnant going by recent reports, though earnings per share are expected to rise and as a result the forward P/E is 15. Billionaire Ken Fisher’s Fisher Asset Management reported a position of 5.6 million shares in its own 13F (find Fisher’s favorite stocks).
Celgene Corporation (NASDAQ:CELG) was another common pick between Renaissance and a company insider. The $50 billion market cap biopharmaceutical company is a growth play in the eyes of the market: it is up nearly 90% in the last year, carrying its trailing earnings multiple up to 36. Wall Street analysts expect high earnings growth going forward- in fact, the five-year PEG ratio is just below 1- though recent performance in terms of net income has not been good. D.E. Shaw, a hedge fund managed by billionaire David Shaw, owned 1.3 million shares of Celgene Corporation (NASDAQ:CELG) at the beginning of April (check out D.E. Shaw’s stock picks).
Renaissance increased its holdings of HollyFrontier Corp (NYSE:HFC), a $9.2 billion market cap refining and marketing company, to a total of nearly 3 million shares. An insider bought 2,000 shares of the stock in late March. The stock trades at 9 times forward earnings estimates, a similar valuation to that of many other downstream oil and gas companies. We’d note that these projections assume a decline in earnings per share over the next year and a half. AQR Capital Management, run by Cliff Asness and his team, was another major shareholder out of the funds we track (research more stocks AQR owns).
An insider was buying shares of Mead Johnson Nutrition CO (NYSE:MJN) in late April, with the fund owning 1.9 million shares of the infant’s and children’s nutrition products company a month prior. The stock carries trailing and forward P/Es of 27 and 22, respectively, despite fairly modest growth numbers; it appears to us that investors are hoping that China (a critical market) will relax its one-child policy. This would stimulate demand in the long run if it occurred, but we still think that we would prefer to avoid the stock rather than invest in these speculations.
Disclosure: I own no shares of any stocks mentioned in this article.
