According to our analysis of studies on insider trading, there is a small outperformance effect for stocks bought by company insiders (read our analysis of studies on insider trading). This finding is generally attributed to the fact that unless insiders are particularly confident in the company, they will choose to diversify their wealth rather than buy stock and therefore increase their company-specific risk. Investors can’t imitate every insider purchase, but it’s possible to think of insider buying similarly to a stock screen: understand that these picks are on average an advantageous “hunting ground” for good picks, look for stocks which might be potential values, and perform more research on these names. Read on for Insider Monkey’s quick take on five stocks which at least one insider has bought recently:
Stefano Pessina’s healthcare and beauty company Alliance Boots has added more shares of Walgreen Company (NYSE:WAG); Pessina serves as a member of Walgreen Company (NYSE:WAG)’s Board of Directors. The drug store chain managed 16% earnings growth in its most recent quarter (which ended in May, and was the third of its fiscal year) compared to a year ago, though revenue only grew 3% over the same time frame. The stock is up 60% in the last year, though with Wall Street analysts being fairly optimistic about future performance this has resulted in a valuation of 14 times forward earnings estimates.
An Accenture Plc (NYSE:ACN) officer’s family limited partnership bought 20,000 shares in early July at about $72 per share. The IT, consulting, and outsourcing services provider is valued at 17 times earnings, whether we compare the current stock price to trailing earnings or forward consensus from the sell-side. Business has been more or less stagnant- the company has been reporting higher earnings per share, but this has primarily been caused by a lower effective tax rate and net benefits from corporate reorganization. We wouldn’t count on either of those factors supporting EPS growth in the future.
Dragon Global Holdings, a company related to the CEO of Endurance Specialty Holdings Ltd. (NYSE:ENH) bought about 3,100 shares of the stock on July 11th. Endurance Specialty Holdings is a $2.3 billion market cap insurance company specializing in property and casualty insurance and reinsurance. Its earnings have been up significantly, though digging into the company’s most recent quarterly report this was due to higher net margins resulting from lower net losses and loss expenses. While the stock is cheap in book terms, the trailing P/E of 16 is a bit outside value territory.
Many of these stocks seeing insider buying recently actually don’t look too appealing at first glance. Brown-Forman looks quite pricy as far as its trailing earnings multiple, and so even though the business has been growing nicely we think that we would avoid it. Verifone is struggling, according to its reports, and we’d at least want to see a reversal of fortune before considering it. The other three stocks covered here aren’t trading at enormously high valuations, but in each case the company’s recent earnings growth has been rooted in expanding net margins and so we are skeptical that they will be able to improve enough going forward to justify their current valuations.
Disclosure: I own no shares of any stocks mentioned in this article.
