Recent studies on insider trading have shown that investors can outperform the market by 7 percentage points by following certain insider purchases. Therefore, in this article, I will take a look at an air-travel company that has seen its insiders buy its stock this year.
United Continental Holdings Inc (NYSE:UAL), is a $14.25 billion market cap holding company that, through its wholly owned subsidiaries, United Air Lines, Inc. (United) and Continental Airlines, Inc. (Continental), transports people and cargo. It became the largest U.S. carrier after acquiring Continental in 2010.
On Monday April 28, Jeffery Smisek, Chairman, President and CEO, acquired 20,000 shares of Common Stock for prices ranging from $39.58 to $39.62 per share, inclusive. He now owns 487,838 shares of the company, worth more than $18.6 million. Earlier this year, on Feb. 12, Jane Garvey, Board Director, also purchased the company’s stock. Mrs. Garvey started a position with 1,150 shares, which se bought at prices ranging from $44.09 to $44.13 per share.
In addition to these insiders, more than 75 major hedge funds are long on this stock. The largest hedge fund shareholder is, by far, Thomas E. Claugus’ Gmt Capital, which held 9.77 million shares of the company at the end of last year. David Tepper’s Appaloosa Management Lp was the second-runner, with 6 million shares. Moreover, Doug Silverman and Alexander Klabin’s Senator Investment Group last reported having increased its stakes by 140%, to 3.6 million shares, and Sean Cullinan’s Point State Capital, – by 241%, to 3.5 million shares. Furthermore, as we have recently reported, Donald Chiboucis‘ Columbus Circle Investors declared, in its latest 13F filing, ownership of 1.71 million shares, valued at $76.4 million.
All of this bullishness cannot be understood by just looking at United Continental Holdings’ fundamentals, as the company boasts razor thin margins and below-average returns, holds alarming debt levels and trades at 41.5x P/E, more than 4 times its industry’s average valuation. In order to comprehend the ongoing activity, one must observe the firm’s growth prospects: analysts expect it to deliver average annual EPS growth rates around 35% over the next five years, and have provided a mean price target of $51.19 per share for the shorter term –this implies an upside potential of more than 30%. Main catalysts include checked-baggage fees, which could generate more than $1 billion in high-margin revenue, the willingness of its customers to pay a premium for certain luxuries that the airplanes provide, and the ability to “shield nearly $9 billion in income taxes due to its massive net operating loss carryforwards” (Morningstar).
With insiders, hedge funds and analysts betting on this company’s future, but with its stock trading at sky-high valuations, is it time to buy?
Disclosure: Javier Hasse holds no position in any stocks mentioned