Alcoa Inc (AA): Multiple Insiders Are Buying

Alcoa Inc (NYSE:AA) unofficially kicked off Q1 earnings season earlier this month by reporting that while its revenue had slipped slightly compared to the first quarter of 2012, earnings had risen strongly in percentage terms to 13 cents per share. The stock price rose slightly on the news, as the earnings results beat Street expectations.

Shortly afterwards- specifically, on April 12th- two members of Alcoa Inc (NYSE:AA)’s Board of Directors, Martin Sorrell and Ratan Tata, each directly purchased between 2,400 and 2,600 shares of the company’s stock at an average price of $8.20 per share. Insider purchases are often taken as bullish signals, since insiders should be quite confident in the company’s prospects in order to buy shares rather than diversifying their wealth.

Studies show that stocks bought by multiple insiders are particularly likely, though of course not certain, to outperform the market (read our analysis of studies on consensus insider purchases). We would note, however, that Tata and Sorrell have both bought Alcoa Inc (NYSE:AA) stock several times in the last two years (including both in early January, though a smaller number of shares). See a history of insider purchases at Alcoa.

At a market capitalization of $8.6 billion, the aluminum company (which is fully vertically integrated from the mining of bauxite to the production of sheet and foil) trades at 36 times trailing earnings. However, the market seems to have improved (as shown by the recent results) and if we annualize adjusted Q1 earnings per share we get a P/E multiple of only 18. That is still a bit higher than we’d like unless there is more earnings growth on the way, and of course we wouldn’t rule out the possibility of a temporary spike in earnings. Consensus for 2014 has Alcoa Inc (NYSE:AA) trading at 10 times forward earnings estimates.

We track 13F filings from hedge funds and other notable investors, using the included information (these filings disclose many long equity positions in U.S. stocks as of the end of each quarter) to develop investing strategies; we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year. The largest position in Alcoa Inc (NYSE:AA)’s equity among the filers we track as of the beginning of January belonged to Ron Gutfleish’s Elm Ridge Capital, which owned 3.7 million shares (find Gutfleish’s favorite stocks). Renaissance Technologies, founded by billionaire Jim Simons, initiated a position of 2.1 million shares during Q4 (see Renaissance’s stock picks).