Recent filings with the SEC show that two members of Capital One Financial Corp. (NYSE:COF)’s Board of Directors each bought about 2,000 shares of stock on April 26th at prices of about $57 per share. We track insider purchases because studies show that buying by insiders is at least something of a bullish signal. When multiple insiders are buying, the average effect becomes stronger (read our analysis of studies on consensus insider purchases). We think that this correlation occurs because insiders have an economic incentive to diversify their wealth rather than add more company-specific risk, and so insider purchases should tend to take place when insiders are more confident than usual in the company’s prospects. As a result we consider stocks bought by insiders, particularly by multiple insiders, to be a useful source of initial investment ideas.
In the first quarter of 2013, Capital One Financial Corp. (NYSE:COF)’s pretax income increased by 30% compared to the first quarter of 2012 if we correct for the effects of an extraordinary gain in that period (earnings came in lower as a result of both that gain and a higher effective tax rate in Q1 2013). This was fueled by considerably higher net interest income, which offset growth in noninterest expenses. Capital One Financial Corp. (NYSE:COF) also delivered significant growth on a q/q basis. Currently the market is being cautious in terms of valuation, with the stock trading at only 11 times its trailing earnings and at a discount to the book value of its equity with a P/B ratio of 0.8. At those levels Capital One Financial Corp. (NYSE:COF) could be a good value just by maintaining its current business, and we’d be interested in learning more about the company.
In addition to insider purchases, we also monitor quarterly 13F filings from hedge funds and other notable investors both to help us develop investing strategies (for example, the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and to see how individual managers are trading individual stocks such as Capital One. We can see that billionaire Andreas Halvorsen’s Viking Global reported owning almost 14 million shares at the end of December, an increase from what it had owned three months earlier (see Halvorsen’s stock picks). Lone Pine Capital, managed by billionaire Stephen Mandel, initiated a position of 4.4 million shares (find Mandel’s favorite stocks).