It’s sometimes said that company insiders have many reasons to sell a stock, but only one reason to buy: they are confident enough in the business’s prospects to overcome the standard aversion to buying shares and therefore increasing their company-specific risk. Empirically, there is in fact a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading). As a result we like to check in on recent insider purchases and see if there are any names which may be worth closer research from retail investors. Read on for our thoughts on five stocks insiders have bought recently.
A member of the Board of Directors at Apache Corporation (NYSE:APA) bought 10,000 shares of the oil and gas company in early September. Apache Corporation (NYSE:APA) trades at 13 times its trailing earnings, as markets are generally pricing large energy companies at low earnings multiples on the theory that profits tied to oil prices have more downside risk than upside potential. Apache Corporation (NYSE:APA) also gets about a quarter of its oil production from Egypt. In terms of energy equivalent, oil is responsible for a little less than half of production volumes.
In addition to insider trading activity, we also follow quarterly 13F filings from hundreds of hedge funds and other investors. Our research has shown that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year (learn more about our small cap strategy), providing us with one use for this information; in fact, our portfolio based on these results outperformed the S&P 500 by 33 percentage points since inception last summer. Of course we can also use this database to track interest in individual stocks over time, and can in fact see that Apache Corporation (NYSE:APA) was billionaire T. Boone Pickens’s top stock pick last quarter (see more stock picks from T. Boone Pickens).
Another stock making our list with a decent dividend yield is AvalonBay Communities Inc (NYSE:AVB), a $16 billion market cap residential real estate investment trust. REITs receive favorable tax treatment conditional on distributing a large share of taxable income to shareholders, which often results in competitive yields; Avalonbay’s is 3.5%. Of course, the company’s cash flows may be tied to strength in the real estate market and many investors may want to avoid that. Billionaire Ken Griffin’s Citadel Investment Group recently reported a position of 1.2 million shares (find Griffin’s favorite stocks). The stock is down 13% in the last year.
Asset manager AllianceBernstein Holding LP (NYSE:AB) also meets our criteria with an insider buying 50,000 shares at an average price of $19.61 per share. For the past few quarters AllianceBernstein has paid out about 40 cents per share in dividends, and assuming that continues into the future then the dividend yield is quite high. However, the payout ratio- at least based on the company’s recent earnings results- is also high. On the other hand, the company has recorded large increases in earnings so far this year compared to a year ago and Wall Street analysts are optimistic enough about 2014 that the forward P/E is only 12.
Disclosure: I own no shares of any stocks mentioned in this article.
