Studies show that stocks bought by insiders slightly outperform the overall market (read our analysis of studies on insider trading). Our explanation for this finding is that according to economic theory, insiders should avoid buying their company’s shares unless they are confident in its prospects; otherwise, it is smart for them to diversify their wealth among a variety of assets possibly even selling shares to do so. Investors can’t (and shouldn’t try to) buy every stock experiencing insider purchases but we think that buying activity makes for a good screen. We like to go through each of these names briefly so that investors can do further research on any which seem interesting. Here are five stocks which insiders have bought recently:
A member of the Board of Directors at Philip Morris International Inc. (NYSE:PM) bought 1,000 shares of the cigarette company’s stock at an average price of $89.07. Philip Morris International Inc. (NYSE:PM) has been seeing declines in gross profit and net income, despite higher sales figures, largely due to increases in excise taxes. While the dividend yield is high in absolute terms at 3.8%, this is a good bit below the yields of other cigarette companies including Altria Group Inc (NYSE:MO) and Lorillard Inc. (NYSE:LO).
We track quarterly 13F filings from hundreds of hedge funds and other notable investors, using the included information to help us develop investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year). This database also comes in handy for tracking interest in individual stocks over time. Renaissance Technologies, founded by billionaire Jim Simons, owned 4.1 million shares of the stock as of the end of March (see Renaissance’s stock picks).
Charles Schwab Corp (NYSE:SCHW) has also had an insider buy shares recently. The investment brokerage house receives a premium valuation in the stock market, with trailing and forward earnings multiples of 34 and 26 respectively; the stock price has risen over 80% in the last year. While Charles Schwab Corp (NYSE:SCHW)’s revenue did increase in the second quarter of 2013 versus a year earlier, the company’s margins fell enough that net income actually declined. Given that financial performance, even considering the insider purchase it doesn’t seem like a good idea to buy at that valuation.