Studies show that stocks bought by insiders outperform the market, with a somewhat stronger effect for stocks bought by multiple insiders (read our analysis of studies on consensus insider purchases). We think that this is because insiders already have an economic connection to the company, and so buying shares of the stock reduces their diversification; therefore, they will generally not buy unless they have a good deal of confidence in the company’s prospects. Even so, we think it’s best to treat insider purchases similarly to a stock screen- using stocks bought by insiders as initial ideas and then doing further research on any companies which seem to be good values. Here are five stocks which our database shows have been bought by multiple insiders in the last month:
Towards the end of April, two insiders at Capital One Financial Corp. (NYSE:COF) bought the stock at prices of about $57 per share. Capital One Financial Corp. (NYSE:COF) actually looks somewhat interesting to us: the stock is valued at a discount to the book value of its equity, with a P/B ratio of 0.8, and at fairly decent earnings multiples as well (although the same is the case for some other large financials). As such we’d be interested in learning more about the company. Billionaire Andreas Halvorsen’s Viking Global reported a position of almost 14 million shares in Capital One Financial Corp. (NYSE:COF) at the end of December (see Halvorsen’s stock picks).
Two members of United States Steel Corporation (NYSE:X)’s Board of Directors were buying the stock in early May. It’s been a tough couple of years for steel in general (as demand is tied to the global economy) and for United States Steel Corporation (NYSE:X) in particular with the stock down 25% in the last year. 30% of the float is held short as many market players remain bearish; the stock is currently valued at a high multiple on trailing earnings, and revenue has been down. While Wall Street analysts are actually somewhat bullish, with their forecasts for 2014 implying a forward P/E of only 11, we think it’s best to wait for better results from the company.
Edwards Lifesciences Corp (NYSE:EW), a $7.6 billion market cap medical device company, has also been seeing significant insider buying. Edwards Lifesciences Corp (NYSE:EW) is perhaps best known for its heart valve therapy products. At the current valuation, the stock trades at 21 times trailing earnings. The company’s revenue grew by 8% in its most recent quarter compared to the same period in the previous year, and while earnings grew at a faster rate further increases in net income are likely to converge towards revenue growth. Sectoral Asset Management owned 1.4 million shares of Edwards at the end of the fourth quarter of 2012.
In addition to the bullishness at United States Steel Corporation (NYSE:X), things are looking up for the steel industry according to insiders at metallurgical coal producer Walter Energy, Inc. (NYSE:WLT). Met coal is an input in steel production, and Walter’s stock price is currently down by about two-thirds from its levels a year ago. The company is unprofitable on a trailing basis and Walter Energy, Inc. (NYSE:WLT) is a popular short target as well (the most recent data has short sellers responsible for 19% of the float). As with United States Steel Corporation (NYSE:X) the sell-side expects conditions to improve here but the forward earnings multiple is still high at 20.
Our database also shows multiple insiders buying shares of $5.5 billion market cap agricultural equipment manufacturer AGCO Corporation (NYSE:AGCO) within the last month. Agricultural equipment companies are generally priced at low earnings multiples in the current environment, and AGCO is no exception with a trailing earnings multiple of 11. Revenue grew 6% in Q1 2013 versus a year earlier, though earnings were down slightly. D.E. Shaw, a large hedge fund managed by billionaire David Shaw, disclosed ownership of about 350,000 shares in its most recent 13F filing (find D.E. Shaw’s favorite stocks).
Disclosure: I own no shares of any stocks mentioned in this article.
