Economic theory tells us that it is rational to diversify- not only one’s investments, but also among the companies responsible for one’s wealth (i.e. what one invests in) and income. So company insiders should avoid buying the stock- and therefore increasing their company-specific risk- unless they are more confident in the stock price than the typical “this will be a good year for us.” Studies do in fact show a small outperformance effect for insider purchases (read our analysis of studies on insider trading). As a result, in addition to our work researching investment strategies based on hedge fund 13F filings (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) we track insider purchases so that investors can review these companies in a bit more detail and decide of they are worthy of further research. Here are five stocks insiders have bought recently:
An insider at Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) reported a direct acquisition of 10,000 shares on March 20th at an average price of $75.44 per share. Ulta is a $5 billion market cap provider of beauty products and salon services. The stock is priced for growth at a trailing P/E of 29, but Wall Street analysts are optimistic about its prospects and so the forward P/E (based on consensus estimates for the fiscal year ending in early February 2015) is 19 with further improvements expected beyond that point. Billionaire Stephen Mandel’s Lone Pine Capital increased its stake by 27% last quarter to a total of 4.2 million shares (see Mandel's stock picks).
A trust associated with a Board member at Churchill Downs, Inc. (NASDAQ:CHDN), the $1.2 billion market cap operator of horse racing tracks, has been purchasing shares during the month of March. Churchill Downs is currently valued at 21 times its trailing earnings; earnings were down substantially in its most recent quarter compared to the same period in the previous year, and revenue growth was fairly low. Paul Reeder and Edward Shapiro’s Par Capital Management owned 860,000 shares of the stock at the end of December.