Tracking hedge fund and insider transactions is crucial to our investment strategy. Our research has shown that the 15 most popular small-cap stocks among hedge funds historically have outperformed the market by 18 percentage points (see the details). In addition, recent studies on insider trading have shown that investors can outperform the market by 7 percentage points by following certain insider purchases.
Insiders have strong incentives to diversify their wealth away from the company they work for — and therefore reduce their risk. Them ignoring the benefits of diversification and buying the company´s stock anyway can be interpreted as a signal of high confidence in the company. This is why, in addition to using hedge fund filings to develop investing strategies, we also maintain a database of insider purchases and take a brief look at significant insider buys to help investors decide if the company is worth further research.
In this article we will look into six companies that are both present in David Einhorn’s Greenlight Capital’s equity portfolio, and have witnessed insider purchases over the past three months.
First on our list is General Motors Company (NYSE:GM), the $58.5 billion market cap auto manufacturer. Although Greenlight Capital last declared that its position in the company had remained unchanged over the fourth quarter of 2013, its bets are still quite high. As the third most valuable holding in the fund’s equity portfolio, Greenlight owns more than 17 million shares -valued at more than $622 million- which account for more than 10% of the total value of its equity portfolio.
Einhorn is not the only one who seems to feel bullish about General Motors. Warren Buffett’s Berkshire Hathaway has more than $1.5 billion invested in the auto-maker. And their ownership is quite easy to understand. As the auto market recovers in the U.S. and Europe, the company should deliver strong earnings growth. In fact, analysts expect the company to deliver an average annual EPS growth rates around 17%-18% over the next five years, outperforming its peers by more than 40%. This must be why most analysts recommend buying this stock, despite its above average valuation of 16x P/E, versus an industry average of 11.7x.
Finally, if the hedge funds’ and analyst’s bullishness is not enough for you, here’s a little bonus. Over 2013′s last quarter, Matthew Tsien, Executive Vice President, increased his stake in the company by about 14%. He currently holds 1,600 shares of common stock.