We track insider purchases filed with the SEC because, in contrast to insider sales (which can often occur merely because an insider is rationally diversifying away from their company), these purchases increase the degree to which an insider’s future income depends on the company performing well. This makes for a risky move, so it should suggest that the insider feels strongly that the market is underestimating its prospects. Studies of insider purchases show that on average stocks bought by insiders outperform the S&P 500. As a result we think that if can be helpful to review recent insider purchases and determine if the underlying stocks really might be good values- effectively, using insider trading activity as a stock screen. Here are five stocks that insiders have bought recently:
Alcoa Inc. (NYSE:AA), the (appropriately) first stock in the Dow Jones to report its earnings for the fourth quarter of 2012, announced that revenue for the quarter had been essentially flat from a year earlier and the company’s profits did not earn a particularly positive or negative reaction from investors. Two of Alcoa’s Board members reacted to the news by purchasing shares; consensus insider buying is a particularly interesting event as stocks with multiple insiders buying are particularly likely (though, of course, not certain) to beat the market. Learn more about consensus insider purchases as a bullish signal. Alcoa trades at 14 times consensus earnings for 2013, with the sell-side expecting considerably higher EPS than in 2012.
William Lewis, Jr., a Board member at Darden Restaurants, Inc. (NYSE:DRI) invested about $500,000 in the stock on January 11th. This boosted his holdings of the restaurant company- it owns Olive Garden and Red Lobster, among other brands- by about 25%. Darden disappointed the market with its most recent earnings report; in the fiscal quarter ending in November 2012, same-restaurant sales dropped 3% (revenue rose due to an acquisition and to more locations at existing brands) and this helped bring net income down considerably. When we looked at Darden we thought that some other restaurants, which trade at slightly higher multiples but have performed better recently, might be better buys (see our analysis of Darden compared to its peers).
Three more stocks seeing insider buying: