Insiders Are Buying Shares of Brown-Forman Corporation (BF.A), Should You?

Since the beginning of July, multiple members of the Brown family have been indirectly purchasing shares of Brown-Forman Corporation (NYSE:BF.A). Our analysis of studies on insider trading has led us to conclude that stocks bought by multiple insiders tend to outperform the market on average, and this finding makes sense to us since insiders already have an economic connection to the company and so unless they have particular confidence in the stock price it is rational for them to diversify rather than buy more shares. Of course, investors can’t mimic every insider purchase, but we think that stocks bought by insiders can be treated similarly to the results of a stock screen in that investors can take a brief look at companies involved and decide whether or not they are worthy of further research.

Brown-Forman, the alcoholic beverage company whose brands include Jack Daniels and Southern Comfort, had its fiscal year end in April 2013. Revenue increased by 5% compared to the previous fiscal year, and costs were held in check enough that earnings grew 15%; both sales and net income were up close to 10% in fiscal Q4 versus a year earlier, so there doesn’t seem to be a real downward trend in financial performance. Sales growth was actually slightly higher in Europe, Brown-Forman Corporation (NYSE:BF.A)’s second largest market, than in the United States. At its current market capitalization of $15 billion, the stock trades at 26 times trailing earnings; even with the good growth numbers in recent reports, that valuation actually seems a bit high to us. Wall Street analysts expect some continued improvement in earnings next year and so the forward P/E is 22.

We follow insider trading activity and also track quarterly 13F filings from hedge funds and other notable investors as part of our work researching investment strategies (we have found, for example, that the most popular small caps stocks among hedge funds generate an average excess return of 18 percentage points per year). Our database shows that billionaire Mario Gabelli’s GAMCO Investors owned about 950,000 shares of Brown-Forman Corporation (NYSE:BF.A) at the end of March (find Gabelli’s stock picks. Other investors reporting a large position in the stock included billionaire Richard Chilton’s Chilton Investment Company, which disclosed ownership of about 930,000 shares (see Chilton’s stock picks) and Winton Capital Management, which is managed by billionaire David Harding (research more stocks Winton owned).