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Insider Buying in Large Cap Stocks

We have been tracking corporate insiders because we believe it is a good starting point to analyze stocks with notable insider purchases. Insiders’ compensations are usually highly correlated with the companies’ performance. If insiders further increase their exposure to their companies’ performance by purchasing their companies’ stocks, it usually means that they have strong reasons to believe the stocks are undervalued by the market. Though insiders are not correct every single time, on the average, they are smarter than ordinary investors as they are much more familiar with their companies and the industry.

In this article, we are going to take a closer look at a few large insider purchases made recently. All transactions were reported to SEC between May 21 and May 25 and all companies have market cap of at least $10 billion.

Bill Miller

BlackRock Inc (BLK): BlackRock was purchased by two insiders last week. On May 23, Director James Grosfeld bought 50,000 shares at about $160 per share. On the same day, another Director Murry Gerber also purchased 3,000 shares at around $160. These transactions were reported to SEC on May 24. The stock is currently trading at $171.43 per share. At the end of the first quarter, there were 15 hedge funds with BlackRock positions in their 13F portfolios. Both Bill Miller’s Legg Mason Capital Management and John Griffin’s Blue Ridge Capital had over $100 million invested in this stock (check out John Griffin’s top stock picks).

BlackRock is the leading asset management company in the world. As of the end of March, the company has approximately $3.6 trillion AUM, up 5% from a year ago. The company’s EPS was improved by 8.7% in the first quarter this year versus the same quarter last year. Its EPS is expected to be $13.28 this year and $14.87 next year, versus $12.38 last year. BlackRock is attractively priced at 11.5X its 2013 earnings, versus the industry average of 14.8. Its share repurchase program is also expected to boost its EPS.

In late May, the company announced that it plans to buy back $1 billion worth of its shares from Barclays. We see a growing need for BlackRock’s investment management services in Europe and Asia, and we also think the greatest opportunities for the company exist in foreign countries. BlackRock also identifies these opportunities and has opened several offices outside the United States towards that end. We believe the company will be able to benefit from international opportunities over the long term.

Mead Johnson Nutrition Company (MJN): Mead Johnson was also bought by two insiders over the past week. Director James Cornelius purchased 10,000 shares at $81.02 per share on May 23. On the following day, another director, Clesteen Clark, bought 100 shares at $81.75 per share. The stock is trading at $82.39 per share now. Hedge funds also showed some interest in Mead Johnson. At the end of March, there were 27 hedge funds reporting to own this stock in their 13F portfolios. Jim Simons was the most bullish hedge fund manager about Mead Johnson. His Renaissance Technologies had $124 million invested in this position as of March 31, 2012 (check out Jim Simons’ top stock picks). Steven Cohen, Ken Griffin, Louis Navellier and Dan Loeb were also in favor of this stock (see billionaire Dan Loeb’s top stock picks).

Mead Johnson reported decent first-quarter results this year. For the three months ending March 31, 2012, the company generated revenues of $987 million, up 9.6% from $900 million for the same quarter a year ago. The growth in revenue also boosted the company’s earnings, while its net income increased by 12.4% from $146.10 million to $164.20 million. The company’s EPS was also improved, moving up 12.7% compared with last year. In fact, the company has demonstrated a positive EPS growth trend over the past few years. In 2011, it reported EPS of $2.47, up from $2.20 for 2010. Analysts expect such growing trend to continue in the future. Mead Johnson is expected to earn $3.15 per share this year and $3.64 per share next year. So the stock is trading at 22.6X its 2013 earnings, a premium to the industry average of 16.

Despite that, we are still bullish about Mead Johnson, especially its operations in Asia and Latin America. In 2011, 66% of Mead Johnson’s sales and 72% of its operating profits were generated from its Asia/Latin America segment. Growth in these markets is expected to remain at double-digit levels, and we think Mead Johnson is well positioned to benefit from the growing consumer trends in these countries.

Valeant Pharmaceuticals International Inc (VRX): Insiders also purchased over 300,000 shares of Valeant Pharmaceuticals International Inc (VRX) over the past week. Insiders have shown great interest in Valeant over the past month. Earlier on May 16, two insiders reported to purchase 300,000 shares of the stock at about $51 (see our previous article about these transactions). We like Valeant. We believe it will largely benefit from its aggressive acquisition plan over the long term.

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