According to a Form 4 filed with the SEC, Fredric Reynolds, a member of the Board of Directors at AOL, Inc. (NYSE:AOL), purchased 28,000 shares of the stock on May 29th at a average price of $34.26 per share. Insider purchases should reflect confidence in the company; otherwise, according to economic theory, company insiders should prefer to diversify their wealth. Studies tend to show a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading). As a result we think that it’s a good idea to review recent insider purchases to see if the stock or its peers might be good targets for further research.
AOL, Inc. (NYSE:AOL) acts as a Web portal, including through its subscription business, and also owns a portfolio of electronic media brands including the Huffington Post. In the first quarter of 2013, revenues were up slightly versus a year earlier as declines in subscription revenue were offset by advertising sales. With SGA expenses significantly reduced, AOL experienced a 23% increase in earnings and with the company’s share count also falling earnings per share came in at 32 cents (up from 22 cents a year ago). Cash flow from operations also increased significantly, and AOL reported about $470 million in cash on its balance sheet in comparison to about $130 million in long-term liabilities. The stock is actually somewhat expensive in terms of earnings- analyst expectations for 2014 imply a forward P/E of 19- though when we take into account the company’s cash haul the valuation metrics look significantly better with a trailing EV/EBITDA multiple of 4.8x.
We track quarterly 13F filings from hundreds of hedge funds and other notable investors, using the included information to help us develop investing strategies (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 can also use our database to see which individual managers like AOL. Billionaire David Shaw’s D.E. Shaw cut its stake in the company by 27% during Q1, but still owned 2.3 million shares (see D.E. Shaw’s stock picks).