George Miller, who serves as a senior vice president at $9.3 billion market cap chemicals and chemical equipment company Sigma-Aldrich Corporation (NYSE:SIAL), bought 1,000 shares of the stock on February 15th at an average price of $76.92 per share according to a Form 4 filed with the SEC. It’s normally not rational for an insider to buy more shares of their company’s stock, and so we take purchases as a sign of particular confidence; studies show that stocks bought by insiders tend to beat the market. Read about studies on insider trading. We attempt to develop investment strategies based on insider trading as well as our work on imitating hedge fund transactions (for example, we have found that the most popular small cap stocks among hedge funds generate an excess return of 18 percentage points).
Sigma-Aldrich Corporation’s revenue and earnings were both up 7% in the fourth quarter of 2012 compared to the same period in 2011. This brought the revenue growth rate for the year as a whole up to 4%, though even after the good quarter net income was about flat from its levels in 2011. At its current price the stock trades at 20 times trailing earnings; we’d generally expect to see better growth rates at that valuation, and we would be cautious of assuming that Sigma-Aldrich’s performance last quarter is going to be a good guide as far as average earnings growth rates over the next few years. Wall Street analyst projections for 2014 generate a forward P/E of 17, which not only assumes significant earnings growth between now and then but also would require considerable improvement from that point in order to justify the current valuation.
Hedge fund positions in Sigma-Aldrich Corporation tend to be fairly small in most cases. Robert Caruso’s Select Equity Group owned the most shares of Sigma-Aldrich at the end of the third quarter of 2012 out of the hedge funds and other notable investors which we track in our database of 13F filings. The fund reported a position of 2.7 million shares (see Caruso’s stock picks).
We can compare Sigma-Aldrich to other specialty chemicals companies, including PPG Industries, Inc. (NYSE:PPG), LyondellBasell Industries NV (NYSE:LYB), Westlake Chemical Corporation (NYSE:WLK), and The Valspar Corporation (NYSE:VAL). In terms of trailing earnings multiples, Sigma-Aldrich is actually priced about even with most of these peers: with the exception of LyondellBasell, all carry trailing P/Es between 19 and 23. None of the three remaining companies seem to be experiencing particularly high growth rates either; Westlake and Valspar actually had their sales decline in their recent quarterly report compared to the same period in the previous fiscal year, while PPG grew both its top and bottom lines at modest rates similarly to Sigma-Aldrich. However, analyst consensus is more bullish on all three and so Sigma-Aldrich possesses the highest forward earnings multiple. We’d note that Westlake and PPG each have about 20% of their outstanding shares held short. That leaves Lyondellbasell, which is valued at 12 times its earnings for last year. Even with modest recorded growth, the stock is up 41% since a year ago. Lyondellbasell is also a considerably larger company in terms of market capitalization.
It seems to us that if an investor is looking for a stock in the chemicals industry, Lyondellbasell should be their first target for future research given its low valuation relative to other companies including those which have been reporting lower sales. We simply aren’t comfortable with Sigma-Aldrich’s valuation relative to its historical earnings, and aren’t ready to accept that its decent fourth quarter- which, even if maintained for a few years, might not justify the current stock price in any case- represents some sort of new normal for the company.
Disclosure: I own no shares of any stocks mentioned in this article.