Our analysis of studies on insider trading shows that while insider selling is generally not informative, stocks bought by insiders tend to narrowly outperform the market (read our analysis of studies on insider trading). Our explanation for this is that insiders have an incentive to diversify their wealth away from the company, and so selling shares often makes sense while buying should signal that the insider has enough confidence in the stock’s prospects to overcome the diversification incentive. While the effect is small, we think that investors can review recent insider purchases for potential investment ideas similar to the way that quantitative stock screens are often used. Here are five stocks which insiders have bought recently:
A Board member at Chesapeake Energy Corporation (NYSE:CHK) purchased 5,000 shares of stock on June 11th at an average price of $21.51 per share. Billionaire activist Carl Icahn took a large position in the natural gas producer last year (research more stocks Icahn owns) after the company’s stock price plunged on concerns that it would have difficulty making its cash flow. Chesapeake Energy Corporation (NYSE:CHK) has since stabilized, though cash flow from operations has remained below capital expenditures. The business is poised to benefit from any potential increase in natural gas prices, with Wall Street analysts projecting enough earnings for 2014 to make for a forward P/E of 10.
We recorded a recent insider purchase at $26 billion market cap drug company Valeant Pharmaceuticals Intl Inc (NYSE:VRX). While the company remains unprofitable going by recent reports, it did report 25% revenue growth in its most recent quarter compared to the same period in the previous year. With Valeant recently announcing the acquisition of Bausch & Lomb, top line growth should continue to increase though we would be concerned about integration risk. Lone Pine Capital, which is managed by billionaire and Tiger Cub Stephen Mandel, bought 4.9 million shares of Valeant during the first quarter of 2013 (check out more stocks Lone Pine was buying).
Copart, Inc. (NASDAQ:CPRT) had a senior vice president of strategic growth for the company purchase 4,500 shares of stock. Copart, Inc. (NASDAQ:CPRT) auctions off cars through the Internet, primarily to dismantlers and rebuilders. The stock has been one of JANA Partners’ top picks; the fund, managed by Barry Rosenstein, believes that Copart, Inc. (NASDAQ:CPRT) could qualify to convert to a real estate investment trust (find Rosenstein’s favorite stocks). REITs receive preferential tax status and so offer more shareholder value, though the IRS may tighten restrictions on its definition of real for these purposes. The company is experiencing higher revenue so far this fiscal year, but the bottom line has not been doing as well.
A trust connected to a member of Rosetta Stone Inc (NYSE:RST)’s Board of Directors bought more than 32,000 shares of the stock in early June. Rosetta Stone is unprofitable on a trailing basis, and last quarter its revenue fell by 8% compared to the first quarter of 2012 with operating losses increasing over the same time frame. Cash flow from operations was negative as well. We’d note that major shareholders in Rosetta Stone recently exited their stake through a public offering of shares, causing a drop in the price prior to the insider purchase. With the business not doing well recently, we would avoid the stock.
Glenn Youngkin, who serves as COO of the Carlyle Group LP (NYSE:CG), recently bought 150,000 shares of the private equity firm. The sell-side is considerably more optimistic about the private equity industry’s prospects this year than the markets: both Carlyle and its peer The Blackstone Group L.P. (NYSE:BX) feature current-year P/E multiples of only 8. When we compared the two companies Blackstone seemed to be performing slightly better at least recently. Given the large insider purchase here and the fact that it might reflect a positive attitude on private equity in general, we’d be interested in learning more about both of these stocks.
Disclosure: I own no shares of any stocks mentioned in this article.
