Studies show that stocks bought by insiders narrowly outperform the broader stock market (learn more about studies on insider trading). Our explanation for this is that insider purchases should be rare except in cases where the insider is particularly confident in the company’s prospects; otherwise, economic theory suggests that it is rational for that insider to diversify his or her wealth away from the company instead. It’s impossible for investors to copy every insider purchase, however, and certainly it isn’t always a good move due to the small size of the effect. However, we think that purchases can serve as a way to identify initial ideas which can then be researched further, similarly to how many investors use stock screens. Here are five stocks which insiders have bought recently:
A holding company connected to a member of the Board of Directors at General Electric Company (NYSE:GE) bought 10,000 shares at an average price of close to $22 per share. While General Electric Company (NYSE:GE) is arguably a good income stock considering its large size and its dividend yield of nearly 3.5%, business has not been particularly good recently and given where the company is currently trading we wouldn’t consider it a good value. Billionaire Ken Fisher’s Fisher Asset Management sold a small portion of its General Electric Company (NYSE:GE) holdings during the fourth quarter of 2012 but closed December with over 30 million shares in its portfolio (find Fisher’s favorite stocks)
Multiple insiders have recently bought stock in Capital One Financial Corp. (NYSE:COF). This is particularly interesting because these “consensus” insider purchases are more likely- though not certain- to outperform the market. Capital One Financial Corp. (NYSE:COF) looks like an interesting value prospect: its trailing and forward P/E multiples are 11 and 9, respectively, and both revenue and pretax income increased significantly in the first quarter of 2013 versus a year earlier if we subtract out the effects of a large gain in Q1 2012. In addition, the combination bank and credit card company carries a small discount to the book value of its equity with a P/B ratio of 0.8.
A Board member’s LLC acquired about 3,500 shares of Mead Johnson Nutrition CO (NYSE:MJN), the provider of infant formula and other children’s nutrition products, at an average price of $82.38 per share. When we looked at Mead Johnson Nutrition CO (NYSE:MJN) it didn’t seem too appealing to us: the market is pricing in high earnings growth over the next several years, as shown by the fact that the forward P/E of above 20, but recent results have not been in line with those implied expectations. Lone Pine Capital, managed by billionaire and Tiger Cub Stephen Mandel, initiated a position of 3.7 million shares between October and December (check out Mandel’s stock picks).
One of Edwards Lifesciences Corp (NYSE:EW)’s Board members purchased 2,000 shares on April 26th at an average price of $64.95 per share. The $7.1 billion market cap medical device company specializes in heart valves and other cardiovascular products. Pretax income grew by 27% last quarter compared to the first quarter of 2012, though revenue growth was only 8% and so we would be a bit concerned as to how sustainable its bottom-line growth rate is. Sectoral Asset Management was one major shareholder of Edwards Lifesciences Corp (NYSE:EW) according to that fund’s most recent 13F filing (research more stocks Sectoral owned).
Disclosure: I own no shares of any stocks mentioned in this article.
