What’s the best method for picking stocks?
In my own decision-making, I employ a variety of tactics, including fundamental analysis and metrics such as price-to-earnings ratio, low debt, and high cash flow. These are traditional approaches to the stock market that should yield good results over time.
However, the retail investor often overlooks a powerful resource during their investigation: the value of insider ownership. An insider can be defined as any officer or director of a publicly-traded company. Research indicates that companies with high insider ownership will outperform their counterparts over time.
Barron’s Magazine publishes a list of recent insider filings on a weekly basis, but falls short on fundamental analysis and potential reasons for buying. Here are three recent insider buys that caught my eye and the underlying story behind each:
Hunting and fishing giant
Shares of Cabelas Inc (NYSE:CAB) have risen to all-time highs in 2013 as President Obama’s agenda on gun control has lead avid outdoorsmen to purchase an excess quantity of firearms and related merchandise. Management reported an impressive first quarter on April 25. Earnings per share rose to $0.70 compared to $0.40 during the year-ago period, and comparable sales grew a massive 24.0%.
Cabelas Inc (NYSE:CAB) currently trades at a rich 25 price-to-earnings, but the valuation will become incrementally more attractive if management continues to deliver high comp. sales and EPS growth during the remainder of 2013. The company is also planning to open an additional 13 stores by the end of 2014, increasing its total store count by nearly 30%.
Optimism on Cabelas Inc (NYSE:CAB) is supported by recent insider purchases. Board member Mark Reuben purchased 15,000 shares of Cabelas Inc (NYSE:CAB) in a series of recent transactions. The total value of the stock exceeded $1 million when it was bought on May 28, 29, and 30.
Mr. Reuben has served on the Cabelas Inc (NYSE:CAB) board since July 2004 and is the former chairman and CEO of Colgate-Palmolive Company (NYSE:CL), where he served as chief executive for an uncommon 23 years. Reuben joined the consumer products giant as a management trainee after receiving his MBA from Harvard Business School in 1963, working his way to the highest rank in the firm.
I believe Cabelas Inc (NYSE:CAB) will need to deliver impressive growth when it releases Q2 results in July for the stock to move higher.
Regional bank
The Cincinnati, OH headquartered Fifth Third Bancorp (NASDAQ:FITB) is a regional lender with more than $120 billion in assets and 1,300 branch locations in 12 states. The company operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending, and Investment Advisors.
Fifth Third Bancorp (NASDAQ:FITB) reported better-than-expected Q1 results back on April 18. Earnings per share rose to $0.46 compared to only $0.39 consensus. Book value per share increased to $15.42, indicating Fifth Third Bancorp (NASDAQ:FITB) stock is trading for approximately 1.2x book based on recent market prices.
Banks and financial services companies traded for 2-3x book value before the 2008-09 credit crisis. Rising book values indicate that investors are beginning to place more confidence in the financial sector.
Board member John Schiff recently purchased 40,000 shares of Fifth Third Bancorp (NASDAQ:FITB) for $18.35 per share. The transaction amounted to nearly $734,000 when the stock was purchased on May 22. Mr. Schiff is the former chairman and chief executive of Cincinnati Financial, where he served as top manager from 1999 through May 2006. Impressively, Schiff has been a board member at Fifth Third Bancorp (NASDAQ:FITB) since 1983.
In my opinion, Fifth Third Bancorp (NASDAQ:FITB) could see $20 per share if management can maintain EPS growth through the end of 2013. Second quarter results will be released on July 18 before the market open.
Tobacco giant
Altria Group Inc (NYSE:MO) is the publicly-traded holding company of Philip Morris USA, parent of the popular Marlboro brand of cigarettes. The company also owns the John Middleton brand of cigars and 26.9% of
The Richmond, VA headquartered Altria Group Inc (NYSE:MO) reported first quarter earnings on April 25. Management reported $0.54 on revenue of $5.53 billion and reaffirmed full-year guidance of $2.35 to $2.41, a 6% to 9% increase in earnings compared to 2012. Altria Group Inc (NYSE:MO) is the undisputed leader in the U.S. cigarette market, but the industry faces long-term headwinds due to falling cigarette consumption and increased regulation.
Altria Group Inc (NYSE:MO) also reviewed its capital allocation program, stating it plans to return 80% of diluted EPS to shareholders through dividends. The company’s board also approved a $300 million buyback program, an insignificant amount for Altria’s $73 billion in market capitalization.
Board member Dinyar Devitre purchased 26,700 shares of Altria Group for $37.04 per share. The transaction value amounted to $989,000 when the stock was purchased on May 22. Mr. Devitre is a former senior vice president and chief financial officer at Altria Group Inc (NYSE:MO), where he served from 2002 to 2008.
In times of fiscal stress, state legislators are keen on raising as much funds as possible, a negative for Altria Group Inc (NYSE:MO) and its customers. Minnesota recently approved a $1.60 per pack tax rate on cigarettes, which will help reduce a $627 million budget deficit over the next two years.
Despite recent insider buying, I prefer Philip Morris International Inc. (NYSE:PM) over its domestic counterpart Altria Group.
Foolish takeaway
Clearly, a significant amount of research is necessary to determine the motivation for insider buying activity.
Specialty retailer Cabelas is flourishing as the gun control debate has caused avid outdoorsmen to purchase an excess number of firearms. The insider at Cabelas is likely betting that record sales will continue into the second half of 2013.
Regional lender Fifth Third Bancorp is performing well after regulators approved its capital plan in March. The Federal Reserve did not object to a $400 million share repurchase plan, a possible reason for optimism. Earnings growth is also accelerating.
Finally, the motivation for insider buying at Altria Group is unclear, as Devitre has been on the board since 2008. I prefer the long-term fundamentals at Philip Morris International Inc. (NYSE:PM) instead.
Do you agree or disagree? Which of the three stocks is your personal favorite? Let me know in the comments section below.
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John Macris owns shares of Fifth Third Bancorp. The Motley Fool owns shares of Fifth Third Bancorp. John is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Insider Transactions From Barron’s Latest Issue originally appeared on Fool.com is written by John Macris.
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