While over the last month or so we have devoted much of our time to analysis of the most recent round of 13F filings and developing investment strategies based on the included information (for example, we have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year), we have also kept an eye on insider trading activity. Studies show that insider purchases are weak bullish signals (read our analysis of studies on insider trading) and we think that this is because in normal times insiders are heavily incentivized to diversify their wealth rather than build up exposure to company-specific risks; it’s only when they are confident the stock will rise that they will actually buy shares (though, of course, they’re not always right). One way to take advantage of this is to treat insider purchases like a stock screen and review recent purchases in search of good buys. Here are five stocks that insiders have bought recently:
A member of Cigna Corporation (NYSE:CI)’s Board of Directors bought 4,200 shares of stock on March 6th at an average price of $59.30 per share. Cigna, a $17 billion health insurance company, recently acquired HealthSpring to increase its Medicare-related business with the result being substantial increases in revenue and earnings last quarter compared to the fourth quarter of 2011. Cigna trades at 11 times trailing earnings, which is more or less in line with other health insurers; we would imagine that many investors are concerned about potential government regulation of insurers if health care costs continue to rise.
Two insiders have been buying shares of Diebold Incorporated (NYSE:DBD), which manufactures ATMs, provides security services, and (most infamously) produces voting machines. Stocks bought by multiple insiders are particularly likely– though not certain- to beat the market. Last quarter was not a good one for Diebold, as it reported a net loss after earning substantial profits earlier in 2012. Consensus for 2014 has the stock trading at only 14 times forward earnings estimates, reflecting an expected improvement in net income. We’d also note that at current dividend levels the yield is rather high at about 4%.
Find three more stocks that insiders have been buying:
An LLC related to the CEO of Dresser-Rand Group Inc. (NYSE:DRC) bought almost 18,000 shares of stock for an average price of $57.02 per share. Dresser-Rand provides equipment and parts to customers in energy, industrial, and power generation businesses. The company reported double-digit growth rates on both top and bottom lines in the fourth quarter of 2012 versus a year earlier. However, a considerable amount of future growth is already priced into the stock given the trailing P/E of 25. The sell-side is expecting very high growth, resulting in a forward P/E of 13 and a five-year PEG ratio of 0.5, but we would be skeptical of such optimistic projections.
Altisource Portfolio Solutions S.A. (NASDAQ:ASPS), a mortgage investor services company, was another stock seeing insider buying. 60% of Altisource’s revenues for 2012 came from one customer, Ocwen Financial; Ocwen, an originator and servicer of mortgage loans, has been growing rapidly (thanks in part to acquisitions) and Wall Street analysts believe that Altisource will therefore generate more business form the company. The current-year P/E is 12, beyond which point Altisource would only need modest earnings growth.
A Board member purchased 70,000 shares of DexCom, Inc. (NASDAQ:DXCM), a $1.1 billion market cap provider of medical instruments which are used by diabetics to monitor blood glucose levels. The average transaction price was $15.50 per share, though the stock has risen a bit in response to the news. DexCom has recorded operating losses each of the last three years, with little change in these losses despite high revenue growth. Cash flow from operations has also been negative, and the company is running low on cash and investments according to its balance sheet. As a result we would recommend avoiding the stock.
Disclosure: I own no shares of any stocks mentioned in this article.
