One of the core principles of finance is that of diversification: a market participant shouldn’t be too exposed to any one particular company. In the case of insiders, who are drawing an income from a publicly traded company, this is even more true- it is irrational to buy shares, making that insider even more dependent on the company’s prospects, unless there is a good deal of confidence in its future. This is at least one explanation for why insider purchases tend to be bullish signals for a stock (learn more about studies on insider trading). Because of this statistical relationship, we track insider purchases to help brainstorm investment ideas; here are some stocks that insiders have been buying recently:
There was a big insider purchase at Zynga Inc (NASDAQ:ZNGA) as a trust which is co-owned by Board member Ellen Siminoff bought 250,000 shares of the flopping recent IPO at an average price of $2.22 per share. Zynga has been sputtering as changes to Facebook’s layout, along with a transition to mobile devices, have impacted its user base; its revenue was up only 3% in the third quarter compared to the third quarter of 2011, not a good sign for a barely profitable company. With expenses rising, pretax earnings have been about flat even if an impairment expense and large boosts to R&D are ignored. As a result we’d still avoid the stock. Read our analysis of Zynga.
J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT) Board member James Robo (who is also the CEO of electric utility Nextera Energy) bought 4,500 shares of the trucking company, which in its most recent quarter reported double-digit growth rates in both revenue and earnings. It’s good for investors that the company is growing, but at 23 times trailing earnings (and 20 times analyst consensus for next year’s earnings) we think that the stock is actually overvalued, including compared to its peers in the trucking industry. We would hesitate to actually short the stock given the insider buy, but don’t think that it’s a good stock to buy either.
Sergio Marchionne, who serves on the Board of Directors at Philip Morris International Inc. (NYSE:PM), has been consistently buying stock in the international provider of Philip Morris-branded cigarette products for the last couple years as the stock has risen (it is currently trading 24% higher than its levels a year ago). On November 1st, he thought it was time to buy again and picked up 1,000 shares at an average price of $88.27. Its earnings multiples are in the mid teens- a trailing P/E of 17, for example- and so we think that the company will need to grow its bottom line in order to justify the current stock price. To do that it will have to see growth in European and Asian markets, something that we’re not sure of.
CEO John McGlade of Air Products & Chemicals, Inc. (NYSE:APD) bought 6,000 shares at an average price of $77.89. We’d covered another insider buy at the $17 billion market cap Air Products & Chemicals fairly recently. As such, this is a stock that is seeing consensus buying among insiders- something which studies indicate is a particularly good sign for investors. See how much better stocks do when multiple insiders buy. The company’s net income fell by more than half in the third quarter versus a year earlier; it trades at 15 times trailing earnings and offers a 3.3% dividend yield, so we think that it might make for a good value if it can halt the decline in its business.
We also noticed consensus insider buying at $13 billion market cap baby formula and powdered milk company Mead Johnson Nutrition CO (NYSE:MJN), with a recent insider purchase being joined by CFO Peter Leemputte’s purchase of 3,000 shares on November 1st. We’re still skeptical of this stock: Mead Johnson Nutrition trades at trailing and forward P/Es of 25 and 20, respectively. That’s high for a company whose operations are about flat from a year ago and well above what we see at its peers. Investors might want to look at it anyway given the consensus purchases, but our impression is that it’s not a good value.