Studies show that stocks bought by insiders tend to narrowly outperform broader market indices (read our analysis of studies on insider trading). We think that this is because insiders are already exposed to company-specific risks, and so buying more shares rather than diversifying their wealth should be irrational according to economic theory unless they have stronger than normal expectations that the stock will do well. Investors cannot imitate every insider purchase, and the overall effect is small in any case, but we think that insider purchases can work similarly to a stock screen: briefly review each name and decide whether or not it is worthy of further research. Here are five stocks that insiders have bought recently:
David Yost, who sits on the Board of Directors at Bank of America Corp (NYSE:BAC) purchased 20,000 shares on April 18th at an average price of $11.51 per share. Bank of America Corp (NYSE:BAC) had been one of the most popular financial stocks among hedge funds in the fourth quarter of 2012 (here are more financial stocks hedge funds loved). Part of the reason for this, we’d imagine, is that the stock carries a significant discount to the book value of its equity with a P/B ratio of 0.6. Wall Street analyst consensus for 2014 implies a forward P/E of 9; this does assume a lot of improvement from current conditions, though revenue and earnings have been up.
The spouse of JPMorgan Chase & Co. (NYSE:JPM) Board member James Crown, as well as what appear to be institutional investors of the Crown family’s funds, bought shares of that bank. Taken with the buy at Bank of America, this may signal internal confidence in megabanks generally. JPMorgan Chase & Co. (NYSE:JPM) stands out among its peers for trading at a discount to book (though a small one) and cheaply in earnings terms as well with a trailing P/E of 9. We would be interested in taking a closer look at the company. Billionaire Ken Fisher’s Fisher Asset Management reported a position of almost 12 million shares at the end of December (find Fisher’s favorite stocks).
BlackRock, Inc. (NYSE:BLK) had one of its Board members invest over $1 million in the stock by purchasing 5,000 shares on April 18th. BlackRock, Inc. (NYSE:BLK) did well in the first quarter of 2013, with revenue up 9% versus a year earlier and net margins widening slightly. However, the stock does carry trailing and forward P/Es of 18 and 14 respectively, and so its value is dependent on the business experiencing similar growth rates for some time. Adage Capital Management, managed by Phil Gross and Robert Atchinson, owned about 310,000 shares at the end of 2012 according to its 13F.
A corporation tied to an insider at Walgreen Company (NYSE:WAG) bought about 83,000 shares of the stock on April 19th. Special items caused the company’s earnings to increase in its most recent quarter compared to the same period in the previous fiscal year, though revenue and operating income were essentially unchanged and so we wouldn’t assume good numbers going forward. The stock trades at 13 times forward earnings estimates, and might be worth watching for future results. William Gray’s Orbis Investment Management was one major shareholder of Walgreen Company (NYSE:WAG) at the beginning of January (check out Orbis’s stock picks).
Panetta Partners, which is directed by Synergy Pharmaceuticals Inc (NASDAQ:SGYP) Chairman of the Board Gabriel Cerrone, purchased 18,000 shares on April 24th. The development stage gastrointestinal drug company has a market capitalization of only about $350 million, but on average over 700,000 shares are traded per day and the current stock price is about $4.80 making for plenty of dollar volume. The sell-side is projecting that Synergy Pharmaceuticals Inc (NASDAQ:SGYP) will lose 68 cents per share this year, and then losses per share will actually increase in 2014 to 82 cents. We would avoid the stock.
Disclosure: I own no shares of any stocks mentioned in this article.
