Should You Imitate the Insider Buying at Walgreen Company (WAG)?

A Form 4 filed with the SEC has disclosed that a corporation connected to Walgreen Company (NYSE:WAG) Board of Directors member Stefano Pessina, who became a billionaire from managing healthcare company Alliance Boots, purchased over 83,000 shares on April 19^th at an average price of $48.62 per share. Studies show a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading). Our explanation for this is that insiders have an incentive to diversify their wealth rather than increase their company-specific risk, and so buying more shares should serve as a vote of confidence in the stock price.

Walgreen Company (NYSE:WAG)’s most recent fiscal quarter ended in February, with the company showing essentially no change in revenue or operating income ex-special items compared to the same period in the previous fiscal year (earnings were up, but this was due to these special items rather than actual improvements in business conditions). Cash flow from operations in the first half of the current fiscal year has been similarly flat. However, Wall Street analysts expect the company’s net income to increase going forward. As a result, the $47 billion market capitalization- which represents a trailing earnings multiple of 22- comes out to only 13 times consensus estimates for the fiscal year ending in August 2014. The stock is up 36% in the last year, possibly linked to the resolution of the drugstore’s dispute with partner Express Scripts Holding Company (NASDAQ:ESRX).

We track 13F filings from hedge funds and other notable investors as part of our work developing investing strategies (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 can also use our database of filings to track interest in individual stocks; Walgreen Company (NYSE:WAG), it turns out, made our list of hedge funds’ favorite healthcare stocks in the fourth quarter of 2012 (find more healthcare stocks hedge funds loved). Billionaire Steve Cohen’s SAC Capital Advisors reported a position of 1.2 million shares (see Cohen’s stock picks) while large hedge fund Arrowstreet Capital increased its stake by 63% during Q4 to a total of 2.3 million shares (find Arrowstreet’s favorite stocks).