Sales of stock by insiders can indicate that the insiders are negative about the company’s prospects, but not always; it is rational to diversify, and if an insider already depends on a company for a portion of their income it can make sense to sell even if they have neutral feelings about the stock. Purchases by insiders are another story. The same logic explaining why insiders might sell even if they aren’t bearish on the stock should prevent insiders from buying- unless, of course, they are so confident that the company is going to beat expectations that it’s worth giving up diversification. This is one explanation for why insider purchases, on average, beat the market. Read more about studies on insider trading. We have gone through our database of insider trading filings and here are five stocks that insiders have bought recently:
A senior Vice President at Health Management Associates, Inc. (NYSE:HMA) bought 10,000 shares at an average price of $7.76. The $2.1 billion market cap hospital operator is smaller than peers such as HCA Holdings (NYSE:HCA), and the market seems to be depending on the company to grow faster than other companies in the industry. The forward P/E is 9- even with HCA’s- but the trailing P/E is 14 and earnings have actually been down to flat in recent quarters. Larry Robbins’ Glenview Capital was a major investor in both of these hospital stocks during the third quarter (see more stock picks from Larry Robbins); as for ourselves, we think that we’d lean towards HCA.
Multiple insiders have been buying shares of women’s retailer Francesca’s Holdings Corp (NASDAQ:FRAN), including the president and the CEO. Consensus buying by insiders is a particularly bullish signal (learn more about consensus insider purchases), at least on average. The company has been reporting strong financials, with revenue up 43% in the third quarter compared to a year ago and net income doubling. However, the valuation already captures significant future growth given the trailing P/E of 26. It’s also widely shorted, and we think that we might avoid it.
Ron Wainshal, the CEO of $840 million market cap aircraft lessor Aircastle Limited (NYSE:AYR), purchased 5,000 shares of the stock at an average price of $12.13. Impairment charges have left the company’s net income down, but if Aircastle is able to get past the impairments it looks like earnings per share could be in a good place. Wall Street analyst consensus is for $1.70 per share in earnings for 2013. There is also a high dividend yield, though the stock’s high beta and leverage make it less than optimal for defensive investors.
Household products company Clorox (NYSE:CLX) was another insider target as a Board member bought 2,000 shares directly and another 1,000 shares through a related company, all at an average price of about $76 per share. Clorox trades at 18 times trailing earnings, and with the company reporting very low growth in revenue and earnings we’d think that price might be about right- not a lot of value opportunity on either side of this trade. See our analysis of Clorox.
Fortune Brands Home & Security Inc (NYSE:FBHS) is up 76% year to date, so it’s particularly surprising to see one of the company’s Board members (as well as his spouse) buying the stock. Fortune Brands’ products include cabinetry, plumbing, windows and doors, and security. Billionaire Ken Griffin’s Citadel Investment Group was buying the stock in the third quarter, with the 3.1 million shares it owned at the end of September up 19% from three months earlier (check out Griffin’s favorite stocks). When we looked at the company it appeared to us that the stock price has outpaced the fundamentals, and so it wouldn’t be a good buy.
