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).
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.
A holding company connected to an insider at NCI Building Systems, Inc. (NYSE:NCS) purchased 4,000 shares of stock on July 22nd. NCI Building Systems, Inc. (NYSE:NCS) manufactures metal components, and also produces metal coil materials to its own manufacturing unit and to outside customers. Acquisitions have helped the company grow its revenues, but the business has remained unprofitable even so and in the first half of its fiscal year cash flow from operations was negative. Analysts are optimistic about next year, and even so the forward earnings multiple is 21.
Multiple insiders have been buying stock in industrial real estate investment trust Terreno Realty Corporation (NYSE:TRNO); the company invests in buildings such as warehouses and distribution facilities near major metropolitan centers. Terreno Realty Corporation (NYSE:TRNO) recently increased its quarterly dividend payment to 13 cents per share, and at current prices that is an annual yield of 2.7%. Real estate investment trusts receive favorable tax treatment conditional on distributing a large share of taxable income to shareholders, which can result in high dividend yields; this is a lower yield than many REITs pay.
$240 million market cap biotechnology company Coronado Biosciences Inc (NASDAQ:CNDO)’s CFO bought about 4,500 shares (on average, about 400,000 shares are traded per day and the current stock price is over $8- making for more than $3 million in daily dollar volume). Coronado Biosciences Inc (NASDAQ:CNDO)’s products are designed to treat autoimmune diseases and cancer. As a development stage biotechnology company, it is not expected to achieve positive earnings either this year or next year. It should be noted that 18% of the float is held short as many market players are bearish.
Many of these companies do not seem interesting on a value basis, and do not seem like good investments at this time even considering the small level of average outperformance of insider purchases. While Philip Morris International Inc. (NYSE:PM)does offer a high yield, as has been mentioned this yield is not very high on a relative basis and so investors should probably look at other stocks in the industry.
Disclosure: I own no shares of any stocks mentioned in this article.
