Here’s Where Insiders Are Stocking Up This Holiday Season

Diversification is one of the most important principles of investing- not only for investors themselves, but also for company insiders. Since they have a strong economic connection to their company they are in a way “invested” in it whether or not they actually own shares. So when they do buy shares, it is a signal that they are so confident in the stock that they are willing to ignore the benefits of diversification- which helps explain why insider purchases are bullish signs. Here are some stocks that insiders have been buying recently:

Multiple insiders have been buying into prepaid card company Green Dot Corporation (NYSE:GDOT). When multiple insiders are buying, it’s a particularly bullish signal: studies show particularly high excess returns in these companies. Green Dot is down 75-80% from its IPO in 2010, so these insiders are likely buying in on the belief that the stock has been beaten down by the market farther than it deserves. See which insiders have been buying Green Dot. The company offers prepaid debit cards from brands such as Mastercard Inc (NYSE:MA) and Visa Inc (NYSE:V); it also provides Visa gift cards and other products. It seems as if Wall Street analysts are on the same side as the insiders here: the stock trades at 8 times consensus earnings for 2013, and the five-year PEG ratio is 0.5. This suggests that the stock will prove undervalued if the company can meet, or even fall just short of, these targets. However, it is widely shorted with 20% of the shares outstanding held short as of the most recent data. In addition, no hedge fund in our database of 13F filings reported owning $10 million or more of the stock at the end of September. Find out more of our thoughts on Green Dot.

David Shaw

Multiple insiders also bought shares of The AES Corporation (NYSE:AES). AES is a global electric utility whose stock price has fallen 12% in the last year; our database of insider trading not only shows two different insiders buying in mid to late November but also records two additional insiders buying the stock earlier in 2012 (see a history of insider purchases at AES). A goodwill impairment converted what would have been earnings growth last quarter versus a year earlier into a sharp decline, and the stock is now at a forward P/E of 8. Its dividend yield does look low, however, at 1.6% (larger utilities such as Dominion Resources, Inc. (NYSE:D) and Duke Energy Corp (NYSE:DUK) pay yields in the 4-5% range). Billionaire David Shaw’s D.E. Shaw reported owning almost 5 million shares of the stock in its 13F filing for the end of the third quarter (check out D.E. Shaw’s favorite stocks). While it’s not as good as other utilities on an income basis, it looks like it has some potential in terms of value and with multiple insiders buying it could be worthy of consideration.

Kansas City Southern (NYSE:KSU), an $8.6 billion market cap railroad, had Board member Henry Davis buy more shares of the stock recently as well. Read our analysis of Davis’s purchase. Kansas City Southern trades at 23 times trailing earnings, a substantial premium over larger railroads such as Union Pacific Corporation (NYSE:UNP) and CSX Corporation (NYSE:CSX). The smaller company also experienced a decline in earnings in the third quarter compared to the same period in 2011, though revenue was up. We have to wonder if we should read Davis’s buy as being bullish on Kansas City Southern specifically, or the railroad industry in general. Rail is a relatively cheap, high-volume way to move freight, and Warren Buffett’s Berkshire Hathaway bought large rail operator Burlington Northern Santa Fe in 2010 (suggesting that the legendary investor likes the industry). See Warren Buffett’s favorite stocks. Billionaire Ken Fisher’s Fisher Asset Management owned 1.2 million shares of Kansas City Southern at the end of September. We think that we might prefer to look at one of the larger railroads.

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