Economic theory tells us that it is rational to diversify- not only one’s investments, but also among the companies responsible for one’s wealth (i.e. what one invests in) and income. So company insiders should avoid buying the stock- and therefore increasing their company-specific risk- unless they are more confident in the stock price than the typical “this will be a good year for us.” Studies do in fact show a small outperformance effect for insider purchases (read our analysis of studies on insider trading). As a result, in addition to our work researching investment strategies based on hedge fund 13F filings (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 track insider purchases so that investors can review these companies in a bit more detail and decide of they are worthy of further research. Here are five stocks insiders have bought recently:
An insider at Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) reported a direct acquisition of 10,000 shares on March 20th at an average price of $75.44 per share. Ulta is a $5 billion market cap provider of beauty products and salon services. The stock is priced for growth at a trailing P/E of 29, but Wall Street analysts are optimistic about its prospects and so the forward P/E (based on consensus estimates for the fiscal year ending in early February 2015) is 19 with further improvements expected beyond that point. Billionaire Stephen Mandel’s Lone Pine Capital increased its stake by 27% last quarter to a total of 4.2 million shares (see Mandel’s stock picks).
A trust associated with a Board member at Churchill Downs, Inc. (NASDAQ:CHDN), the $1.2 billion market cap operator of horse racing tracks, has been purchasing shares during the month of March. Churchill Downs is currently valued at 21 times its trailing earnings; earnings were down substantially in its most recent quarter compared to the same period in the previous year, and revenue growth was fairly low. Paul Reeder and Edward Shapiro’s Par Capital Management owned 860,000 shares of the stock at the end of December.
Filings with the SEC have shown that both the CEO and CFO of Rouse Properties Inc (NYSE:RSE), a real estate investment trust focused on shopping malls which was spun out from General Growth Properties Inc (NYSE:GGP) a little over a year ago, bought shares at prices of about $16.90 per share. Consensus insider purchases are a stronger bullish signal than only one insider buying (learn more about consensus insider purchases). Even though many REITs pay high dividend yields due to IRS requirements, that is not the case for Rouse: its yield, going by the current price and recent quarterly payments, is 1.7%.
SCBT Financial Corporation (NASDAQ:SCBT) had one of its Board members invest nearly $100,000 in the stock on March 21st; he now owns over 8,000 shares of the $860 million market cap Southeastern regional bank (at 50,000 shares traded per day and a price over $50 per share, there is sufficient daily dollar volume for most investors). Many regional banks have been doing well recently, and SCBT is up 52% in the last year. Earnings increased 22% in the fourth quarter of 2012 versus a year earlier. The stock carries trailing and forward P/Es of 25 and 13, respectively.
A member of Atlantic Power Corp (NYSE:AT)’s Board of Directors directly purchased 12,000 shares on March 19th, nearly doubling his holdings of the stock. The electric utility’s market capitalization is only about $620 million, but on average over 1.4 million shares are traded per day and the stock price is above $5. Atlantic Power has been paying monthly dividends between 9 and 10 cents per share for two and a half years, making for an annual yield of 7.3%. It might be a good prospect for income investors.
Disclosure: I own no shares of any stocks mentioned in this article.
