Our analysis of studies on insider trading has concluded that stocks bought by insiders exhibit a small outperformance effect, which makes sense as insiders should be reluctant to buy shares (increasing their company-specific risk) unless they are quite optimistic about the stock. While investors clearly can’t take advantage of this by imitating every insider purchase, we think that insider purchases can serve as a stock screen similar to low earnings multiples or price to book ratios. Investors can review a list of stocks bought by insiders, knowing that this is a favorable “hunting ground” and do more research on any interesting names. Read on for our quick take on five stocks which insiders have bought recently.
The Chairman of Cognizant Technology Solutions Corp (NASDAQ:CTSH)’s Board of Directors bought 7,500 shares of stock in mid June. Cognizant Technology Solutions Corp (NASDAQ:CTSH) is an IT and consulting solutions and services company. The business has been experiencing double-digit growth rates on both top and bottom lines, and with a trailing P/E of 18 it could prove undervalued if this strong performance continues. In addition to insider trading filings, we also maintain a database of 13F filings from hundreds of hedge funds and other notable investors. We use these filings to develop investing strategies based on hedge fund activity (for example, the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and also to monitor interest in individual stocks over time. We can see from our database that Lone Pine Capital, managed by billionaire Tiger Cub Stephen Mandel, owned 8.7 million shares of Cognizant Technology Solutions Corp (NASDAQ:CTSH) as of the beginning of April (see Mandel’s stock picks).
Ryman Hospitality Properties, Inc. (REIT) (NYSE:RHP) had its CEO purchase 20,000 shares on June 10th at an average price of $34.27 per share. Ryman Hospitality Properties, Inc. (REIT) (NYSE:RHP) is a real estate investment trust whose business is dividend between several combination hotel and convention centers and a number of tourist attractions in Nashville. The stock currently yields 5.5%- high yields are common with REITs- but the stock is down in the last year as business has not done well. Billionaire John Paulson’s Paulson & Co. disclosed ownership of 2.2 million shares in its most recent 13F (find Paulson’s favorite stocks).
Our database also tracked the CEO of $930 million market cap aerospace and industrial components company Kaman Corporation (NYSE:KAMN) buying shares. In addition, two more company insiders were buying the stock in May; consensus insider purchases are particularly bullish signals (read our thoughts on studies of consensus insider purchases). Revenue was flat in the first quarter of 2013 versus a year earlier, and between that and higher costs Kaman Corporation (NYSE:KAMN) experienced a 24% decline in net income. At a trailing P/E of 17, we think that even given the consensus buying the stock looks too pricy to make a good value play right now.
Multiple insiders have also been buying HollyFrontier Corp (NYSE:HFC), a $9 billion market cap oil and gas refining company. Downstream energy companies generally carry low earnings multiples in the current market environment, and HollyFrontier Corp (NYSE:HFC) is no exception with analyst forecasts for 2014 implying a forward P/E of only 8. The company’s revenue has been down recently, but we still think Hollyfrontier is worth comparing to its peers on a value basis. Renaissance Technologies, whose founder Jim Simons is now a billionaire, disclosed ownership of almost 3 million shares at the end of March (check out more stocks Renaissance owns).
An insider at VeriFone Systems Inc (NYSE:PAY) was buying the stock shortly after a roughly 20% plunge in the stock price, which in turn followed a disappointing report for the second quarter of Verifone’s fiscal year. During the quarter, the provider of business products such as electronic payment equipment recorded an operating loss even after adding back special items related to litigation loss contingencies. While analysts believe the company will recover, and the forward P/E is 10, we’d still avoid it for now given how much VeriFone Systems Inc (NYSE:PAY) has been struggling recently.
Disclosure: I own no shares of any stocks mentioned in this article.
