In today’s markets, there are many indicators being used by investors, though one of the most underappreciated may be insider trading sentiment. Empirical studies have proven that if individuals mimic or “monkey” a company’s most profitable insiders, they can beat the market by 7 percentage points a year. Even better, a statistically significant correlation between excess returns and heavy insider buying has existed for the better part of the past half-century, so this strategy isn’t a flash in the pan, so to speak. Below is one company with insider buying that isn’t getting a lot of press, so we’re here to assist.
Brown-Forman Corporation (NYSE:BF.A) (NYSE:BF.B) is a diversified manufacturer of premium spirits, and is best known for its Jack Daniel’s Tennessee Whiskey, Southern Comfort, and Finlandia vodka. The company’s stock has been a solid investment since the recession, returning 79.0% over the past three years. More recently, shares of Brown-Forman have risen 18.0% since the start of 2012, which is actually slightly off the Wineries & Distilleries industry average (22.7%), but an impressive return nonetheless.
Since August 31st, two of Brown-Forman’s directors – Brown Dace Stubbs and Lordi Joan Amble – have been quite the bulls, purchasing a total of 25,523 shares in their company at an average purchase price of $63.11. Altogether, these transactions were worth a little over $1.6 million. Stubbs was the most active of the two, recording six separate purchases in the past three weeks, accounting for 94.1% of the duo’s transactions.
Two days before this bullish activity commenced, Brown-Forman blew away the Street’s earnings estimates with a first quarter profit of $147.5 million. This total was an increase of nearly 25% on a year-over-year basis. Moreover, the company’s Q1 EPS of 69 cents a share beat analysts’ estimates quite handily, which were averaging 63 cents a share prior to the release. Brown-Forman cited that their improved financial position was a result of an increased focus on its customer base outside of the U.S., and most importantly to investors, booming growth in shipments of its Jack Daniel’s whiskey line.
By the end of its current fiscal year (FY2013), the Street projects that Brown-Forman will reach earnings of $2.54 a share. This total looks very attainable after the company’s big-time first quarter. If these estimates are met, it would mark an EPS increase of 6.81% from last year, which is middle-of-the-road compared to competitors like BEAM Inc. (NYSE:BEAM) at 12.7%, Diageo plc (ADR) (NYSE:DEO) at 11.4%, and Constellation Brands, Inc. (NYSE:STZ) at -15.1%.
Interestingly, Brown-Forman also looks like a middling investment from a valuation standpoint, at least in terms of earnings growth, as it trades at a PEG ratio of 2.24; typically any figure above 2.0 signals an overvaluation. More importantly, however, this is below the likes of BEAM (4.33), Diageo (2.38), though above Constellation Brands’s PEG of 1.60. Forward-looking earnings multiples tell a rather similar story, as Brown-Forman currently sports a Forward P/E ratio of 22.06, which is actually above each of its aforementioned competitors by an average premium of 24.6%.
One positive aspect of Brown-Forman’s financial position is that earnings growth is speeding up rather significantly. After averaging an annual EPS growth rate of 7.4% over the last five years, early estimates expect the company’s bottom line to grow upwards of 11% a year over the next half-decade. This positive growth differential is larger than Diageo (-11 basis points) and Constellation Brands (+398bp), but far below that of BEAM (4,200 basis points).
Consequently, the recent round of insider buying activity at Brown-Forman seems motivated by the company’s previously released first quarter earnings results, not based on any striking undervaluation. It’s possible that if the spirits manufacturer hits its FY2013 EPS targets, investors could see moderate price appreciation, but world-beating returns aren’t expected here.
In the hedge fund industry, 21 managers held shares of Brown-Forman at the end of this year’s second quarter, and according to their 13F filings, Tom Russo is the most bullish of the bunch. Russo’s fund holds more than $174 million in the stock, which is thrice the size of the next largest position, held by James Crichton and Adam Weiss. Other prominent funds that are long Brown-Forman include Jim Simons, Ken Griffin, and Richard Driehaus. For a complete look at the hedge fund industry’s sentiment toward this stock, continue reading here.