Company insiders should be unlikely to buy the company’s stock unless they are particularly confident in the business’s prospects; otherwise, economic theory holds that it is rational for them to diversify their wealth instead. This is one explanation for why stocks bought by insiders narrowly outperform the market on average (read our analysis of studies on insider trading) and one of the reasons why we like to track insider trading activity. We can also compare recent insider purchases to the portfolios of top hedge funds such as billionaire Stephen Mandel’s Lone Pine Capital, as we track hedge funds’ quarterly 13F filings as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). Here are the five largest holdings in Mandel’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 Lone Pine reported owning):
Insiders have been buying shares of Dollar General Corp. (NYSE:DG), and the discount retailer was the fund’s third largest holding overall by market value per its 13F. Dollar General Corp. (NYSE:DG) trades at 18 times trailing earnings, even though recent quarterly results have suggested that the dollar store’s growth rates are slowing. While its low beta (of 0.2) does deserve mention, the valuation is high enough that the company is dependent on further EPS growth and we’d consider it a fairly speculative stock. Tiger Global Management initiated a position of 5.3 million shares in Dollar General Corp. (NYSE:DG) between January and March (research more stocks Tiger Global was buying).
Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA), a $6.2 billion market cap cosmetics and associated products retailer, was another common pick between Lone Pine and at least one company insider. Once again we have a stock which carries a premium valuation: the forward earnings multiple here is 23. Ulta Salon recently popped 10% after reporting a positive earnings surprise for its most recent fiscal quarter (the first quarter of its fiscal year, ending in April). Brookside Capital, a hedge fund which is part of the Bain Capital alternative asset management family, disclosed ownership of 1.7 million shares as of the beginning of April.
Mandel and his team reported a position of 7.3 million shares of American International Group Inc (NYSE:AIG), which an insider purchased 10,000 shares of in May at an average price of $45.20 per share. American International Group Inc (NYSE:AIG) lost its place as the most popular stock among hedge funds to Apple last quarter, falling to the #3 slot in our top ten list (find more of hedge funds’ favorite stocks). The insurer trades at a discount to the book value of its equity, with a P/B ratio of 0.7, and while we wouldn’t expect that figure to rise to 1 anytime soon due to poor sentiment it does suggest there is at least some upside potential for American International Group Inc (NYSE:AIG).
Two members of Capital One Financial Corp. (NYSE:COF)’s Board of Directors bought shares of the stock at the end of April, while Lone Pine closed the first quarter of this year with 5.1 million shares in its portfolio. Capital One is another financial stock with a P/B a bit below 1, and we’d note that it’s also arguably in value territory in earnings terms as well: the trailing and forward P/E multiples are 12 and 9, respectively. However, earnings declined last quarter compared to the first quarter of 2012. Billionaire Andreas Halvorsen’s Viking Global is another major shareholder in Capital One (see more stocks Viking Global likes).
Disclosure: I own no shares of any stocks mentioned in this article.
