Corporate insiders usually have more information about their own companies than average investors. They also understand their companies and their industries way better than ordinary investors. Therefore, in general, insiders make better decisions about purchasing their companies’ stocks compared to other investors. While not every single insider purchase is able to beat the market, on average, insider purchases do tend to outperform the market in the 12-month period following the transaction.
In this article, we are going to take a closer look at a few large-cap stocks with significant insider purchases recently. The companies on our list have market caps of at least $10 billion and the insider purchases were reported to SEC between May 14 and May 18, 2012.
Valeant Pharmaceuticals International Inc (VRX): On May 14, Jeffrey Ubben’s ValueAct Holdings LP purchased 295,000 shares of Valeant at $50.98 per share (check out Jeffrey Ubben’s top stock picks). On the same day, Director Laurence Paul also purchased 5,000 shares at $51.03 per share. These transactions are reported to SEC on May 16. Valeant is now trading at about $47.19 per share. Insiders have shown great interest in Valeant over the past couple of months. ValueAct also purchased 419,000 shares at $51 per share earlier on May 8. In March, EVP and CFO Bradley Howard Schiller also bought 27,800 shares of the stock at $53-54 per share.
We are favorable about Valeant’s acquisition plan. We see strong growth in dermatologic sales, as the company recently purchased Dermik and Ortho Dermatologics. Additionally, the acquisition of AB Sanitas is expected to boost its sales in Eastern Europe and the purchase of iNova will benefit its business in Australia. Plus, Valeant is planning to maintain its aggressiveness in acquisition in the year ahead, and we think the company is capable of doing so. It has a solid balance sheet and strong cash generation abilities. For the first quarter of 2012, Valeant generated net operating cash flow of $167.23 million, up 93.71% from the same quarter last year and significantly outpacing the industry average of 5.51%.
Hedge funds have also showed great interest in this stock. At the end of 2011, forty-five hedge funds reported owning Valeant in their 13F portfolios. Legendary investor Julian Robertson’s Tiger Management had around $20 million invested in this stock at the end of the fourth quarter (see Julian Robertson’s top stock picks). John Griffin, Jacob Gottlieb, and Andreas Halvorsen were also bullish about Valeant. They all had at least $100 million invested in this position at the end of December.
Continental Resources Inc (CLR): On May 15, Harold Hamm, CEO and Chairman of Continental Resources, purchased 100,000 shares of the stock at prices ranging from $71.51 to $72.21 per share. On the same day, Director Daivd Boren sold 3,334 shares at $71.11, but insider sales are relatively insignificant as they are more likely to be motivated by liquidity or diversification needs. Right now, the stock is trading at around $77.50 per share. A few hedge funds are also bullish about Continental Resources. Jeffrey Vinik’s Vinik Asset Management had $46 million invested in this stock at the end of last year while Murray Stahl’s Horizon Asset Management reported owning $32 million of Continental Resources shares.
Continental Resources reported strong first-quarter results compared with the same quarter last year. Its total revenue for the first quarter of 2012 was $395.1 million, versus -$36.21 million for the same quarter in 2011. Its revenue growth largely exceeded its industry average growth rate of 11.7%. In turn, the rapid growth in revenue help boosted the company’s earnings. Continental Resources reported net income of $69.09 million, versus -$137.20 million for the first quarter of 2011. Net operating cash flow also increased significantly, swelling 86.54% to $364.94 million, and beating the industry average growth rate of 10.51%.
However, such rapid growth is unlikely to be sustainable. Analysts expect the company to have a single-digit EPS growth rate over the next five years. In fact, its EPS is expected to grow at an average of around 8% annually. The stock is also not as attractive as other energy stocks when it comes to valuation. Analysts expect Continental Resources to earn $3.50 per share in 2012 and $4.63 per share in 2013, versus $2.92 per share for the trailing 12 months. Its P/E ratio for 2013 is about 15, versus the industry average of 11.4 – and its main competitors are positioned even better. Chesapeake Energy Corporation (CHK), for example, has a 2013 P/E ratio of below 8. Hedge funds also like Chesapeake better. There were 25 hedge funds with positions in Chesapeake at the end of 2011, versus 15 for Continental Resources. Former oilman T. Boone Pickens likes Chesapeake. His BP Capital had $12 million invested in this stock at the end of March (check out T. Boone Pickens’ top stock picks).
Hess Corp (HES): Over the past week, insiders also purchased 20,000 shares of Hess Corp at prices ranging from $45.79 to $45.88 per share. In late April and early May, two other insiders also bought 58,000 shares of Hess. This energy stock seems to be trading at a discount. It is expected to earn $6.43 per share this year and $7.54 per share next year. Currently trading at about $46 per share, Hess has a 2013 P/E ratio of only 6.1. It is also quite popular amongst hedge funds. Ken Griffin’s Citadel Investment Group had $80+ million invested in Hess at the end of last year (see billionaire Ken Griffin’s top stock picks).