Company insiders had better know what they are doing when they purchase shares. Because their future earnings are already tied to the company’s prospects, buying a larger stake in its equity makes for particularly poor diversification. Therefore, in theory insider buying should be a bullish sign for a stock- the insider is so confident that the stock will rise in the future that the expected gains trump the gains from diversification. It turns out that this is the case: insider buying tends to be profitable. At Insider Monkey, one of the trends we track is insider investment activity to help give investors a chance to imitate insider buying and hopefully outperform the market over time by exploiting this statistical relationship. Here are some recent cases of insider buying:
Last month we reported that the CFO of Delta Air Lines, Inc. (NYSE:DAL) had purchased 50,000 shares of the company (read more about the purchase and Delta Air Lines). Now Board member Kenneth Woodrow has also added shares of the stock, buying 25,000 shares at an average price of $8.71. This is notable because consensus insider buying is a particularly bullish sign. Delta is only a few years out of bankruptcy, and trades at only 8 times trailing earnings as investors shy away from the airline. However, consolidation is on the rise in the industry, which may allow higher pricing, and Delta trades at only 3 times forward earnings estimates and a five-year PEG of 0.1. Will the company do quite that well? We are skeptical, but even low growth easily justifies a higher valuation. We think that Delta Air Lines, Inc. (NYSE:DAL), while risky, is a value stock as it is and seeing multiple insiders buy in gives us greater confidence.
The head of Axis Capital Holdings Limited (NYSE:AXS)’s reinsurance division, John Nichols, bought 30,000 shares of the company at an average price of $33.60. This brings his total ownership to 80,000 shares. Axis, which also offers other products such as property and liability insurance, successfully cut some costs last quarter, driving its earnings per share up 71% from a year earlier. Axis trades at 8 times trailing earnings and pays a 2.9% dividend yield. As a result, we think that it is a good value for investors who are willing to accept exposure to the insurance industry. And again, as with Delta, we see that an insider is forgoing diversification benefits in order to invest in the stock.
Kenneth Kelley, a director at Halozyme Therapeutics, Inc. (NASDAQ:HALO), added 20,000 shares of the company to his portfolio for a total of 150,000. The shares were purchased at an average price of $5.70, slightly lower than the price at the time of this writing. Halozyme is a biotech company which produces human enzymes designed to make it easier for medical professionals to inject other medical compounds through the skin. As might be expected, the company is a money loser and is not expected to be profitable either this year or next year. The stock has dropped 38% so far in 2012 and Kelley apparently believed that drop was too drastic.
Finally, General Growth Properties Inc (NYSE:GGP) spinout Rouse Properties Inc (NYSE:RSE) saw insider buying from President and CEO Andrew Silberfein. Silberfein directly bought 15,000 shares at an average price of $13.83. Hedge funds love spinout stocks because the new management is generally better able to focus on strategies for increasing the value of the spinout’s specific assets. Rouse owns 30 regional malls in 19 U.S. states- not an ideal industry if concerns about consumer spending prove warranted. So far this year the stock is about even with the S&P 500 and significantly underperforming General Growth Properties.