It’s common for company insiders to talk up their company’s stock, but it’s less common for them to actually buy. This is because- in addition to the fact that rosy predictions are sometimes less than honest- by buying more stock an insider is increasing their exposure to company-specific events rather than diversifying their wealth as is predicted by economic theory. As a result actual purchases should signal a particularly confident insider rather than one who is casually buying the stock, and it turns out that stock bought by insiders do have a slight outperformance effect read our analysis of studies on insider trading). Of course it’s impossible to copy every insider purchase, but we like to take at least a brief look at significant buys so that investors can do more research on stocks that seem appealing. Here are five stocks insiders have bought recently:
Shona Brown, a member of PepsiCo, Inc. (NYSE:PEP)’s Board of Directors, bought 1,000 shares of stock at an average price of $75.33. The global beverage and snack company reported high earnings growth in the fourth quarter of 2012 versus a year earlier, but sales were actually down slightly and the current trailing earnings multiple looks a bit high at 20. We would want to see revenue growth before considering a purchase. Renaissance Technologies, whose success since inception has made founder Jim Simons a multi-billionaire, bought 2.6 million shares of Pepsi last quarter (see more stock picks from Renaissance Technologies).
Two insiders bought shares of The Cheesecake Factory Incorporated (NASDAQ:CAKE) generally between $34 and $35 per share. Consensus insider purchases are particularly likely- though not certain- to be bullish signals (learn more about consensus insider purchases). While earnings per share were up 9% in Q4 from levels in the fourth quarter of 2011, this was primarily due to buybacks with revenue and net income rising only 2-3%. Cheesecake Factory also trades at 20 times trailing earnings and while it’s good that the company is returning cash to shareholders we would be skeptical of this valuation as well.
Find three more stocks insiders have been buying:
Gilead Sciences, Inc. (NASDAQ:GILD) has also had a Board member buy shares: 20,000 of them at prices of around $33 and $34. The $68 billion market cap biotechnology company experienced double-digit growth rates on both top and bottom lines in its most recent quarter compared to the same period in the previous year. Since the beginning of March 2012 the stock price has been consistently rising and has nearly doubled. This has brought its earnings multiples above those of similar companies, though Gilead’s growth rates have also been higher than its peers and the gap does narrow considerably when we look at forward estimates.
A member of Terex Corporation (NYSE:TEX)’s Board of Directors added over 3,500 shares in late February at an average price of $33.10. Terex provides work platforms (including cranes) and construction machinery. As a result the stock price is very sensitive to movements in broader market indices, and its beta is 3.6. Terex is another growth story: sales growth has been strong and earnings per share came in at 93 cents for 2012 after having been negative only two years earlier. The company did miss the Street’s earnings expectations in the fourth quarter of the year, and the current price does depend on continued earnings growth.
Richard Perlman, executive chairman of Examworks Group, Inc. (NYSE:EXAM), a $520 million market cap company which investigates insurance claims, purchased more than 14,000 shares of the company’s stock in early March through his Roth IRA. When we looked at the company we noticed that revenue growth rates have been slowing down and- until the most recent quarterly report- net losses had not been showing much of an improvement. Examworks is a popular short target, with 15% of the outstanding shares held short despite a significant cash hoard.
Disclosure: I own no shares of any stocks mentioned in this article.
