Insiders should be very hesitant to buy more stock in the company. They already benefit from (or are harmed by) company-specific events, and so the principles of diversification should prevent them from tying more of their wealth to the same business. Actual purchases, then, should signal that the insiders are fairly sure that the stock price will rise. As it turns out, consensus insider purchases- multiple company insiders buying the stock- do tend to precede a stock outperforming the market (see our analysis of studies on insider trading). We looked at our database of insider trading filings and here are five basic materials companies which have had multiple insiders buy the stock in the last three months:
Two insiders have bought shares of Alcoa Inc. (NYSE:AA) since the beginning of 2013, and one of those insiders was also buying in November of last year. Wall Street analysts expect earnings per share to more than double this year after a rough 2012; the aluminum company’s current-year P/E multiple is 10. Their forecasts suggest a slow start to the year before better earnings numbers in the second half of 2013 into 2014. Alcoa’s revenue was down slightly last quarter compared to Q4 2011. Elm Ridge Capital, managed by Ron Gutfleish, owned 4.5 million shares of Alcoa as of its most recent 13F filing (find Gutfleish’s favorite stocks).
Several insiders have been buying AK Steel Holding Corporation (NYSE:AKS), a producer of steel with a market capitalization of about $450 million (9 million shares are traded on average per day). The stock has fallen 58% in the last year as weak macro conditions have harmed steel demand (the stock’s beta is 2.1, demonstrating the close connection to the broader economy) and the most recent data has 29% of the outstanding shares held short. However, these insiders apparently believe that the company has room for improvement and the current price is only 8 times consensus earnings for 2013. Cliff Asness’s AQR Capital Management added shares in Q3, though the stake was very small for the large hedge fund (check out more stocks Asness was buying).
Three more basic materials stocks insiders have bought:
Chemtura Corporation (NYSE:CHMT), a $2.4 billion market cap chemicals company, has had two insiders but the stock in the last three months. Billionaire James Dinan’s York Capital reported a position of 2.8 million shares at the end of September (see more stocks York owns). Demand for chemicals is also dependent on macro factors and the beta is just above 2 here as well. Chemtura carries trailing and 2013 price-to-earnings multiples of 21 and 13, respectively, as Wall Street analysts project high earnings growth in the current year. The stock has risen 70% in the last year as general market sentiment has become bullish as well.
Rare earth materials provider Molycorp Inc (NYSE:MCP) is another basic materials stock that insiders have been buying. The market is even more bearish here than on AK Steel: the stock price is down over 70% from a year ago and over 60% of the float is held short. Molycorp also carries a very high beta, at 3.8. While revenue was up 49% in the third quarter of 2012 compared to the same period in the previous year, the company remained unprofitable and is expected to remain in the red for 2013 as well. Molycorp did report over $400 million in cash on its balance sheet in its most recent quarterly report.
Two Board members have been increasing their holdings of $1.9 billion market cap steel recycler and producer Commercial Metals Company (NYSE:CMC). Carl Icahn has a large position in Commercial Metals (research more stocks Icahn likes). While the company is profitable- and actually doesn’t look that expensive in terms of its earnings, with a trailing P/E of 13- it did report a 10% drop in sales in its fiscal quarter ending in November, along with a 54% decrease in earnings. It might be best to avoid the stock.
Disclosure: I own no shares in any stocks mentioned in this article.