Tracking hedge fund and insider transactions is crucial to our investment strategy. Our research has shown that the 15 most popular small-cap stocks among hedge funds historically have outperformed the market by 18 percentage points (see the details). In addition, recent studies on insider trading have shown that investors can outperform the market by 7 percentage points by following certain insider purchases.
Insiders have strong incentives to diversify their wealth away from the company they work for — and therefore reduce their risk. Them ignoring the benefits of diversification and buying the company´s stock anyway can be interpreted as a signal of high confidence in the company. This is why, in addition to using hedge fund filings to develop investing strategies, we also maintain a database of insider purchases and take a brief look at significant insider buys to help investors decide if the company is worth further research.
In this article we will look into six companies that are both present in David Einhorn’s Greenlight Capital’s equity portfolio, and have witnessed insider purchases over the past three months.
First on our list is General Motors Company (NYSE:GM), the $58.5 billion market cap auto manufacturer. Although Greenlight Capital last declared that its position in the company had remained unchanged over the fourth quarter of 2013, its bets are still quite high. As the third most valuable holding in the fund’s equity portfolio, Greenlight owns more than 17 million shares -valued at more than $622 million- which account for more than 10% of the total value of its equity portfolio.
Einhorn is not the only one who seems to feel bullish about General Motors. Warren Buffett’s Berkshire Hathaway has more than $1.5 billion invested in the auto-maker. And their ownership is quite easy to understand. As the auto market recovers in the U.S. and Europe, the company should deliver strong earnings growth. In fact, analysts expect the company to deliver an average annual EPS growth rates around 17%-18% over the next five years, outperforming its peers by more than 40%. This must be why most analysts recommend buying this stock, despite its above average valuation of 16x P/E, versus an industry average of 11.7x.
Finally, if the hedge funds’ and analyst’s bullishness is not enough for you, here’s a little bonus. Over 2013’s last quarter, Matthew Tsien, Executive Vice President, increased his stake in the company by about 14%. He currently holds 1,600 shares of common stock.
Another interesting case is EMC Corporation (NYSE:EMC), a $53 billion market cap company that develops, delivers and supports the Information Technology (IT) industry’s range of information infrastructure and virtual infrastructure technologies, solutions and services. Einhorn’s fund started a new position in the company over Q4, with 2.9 million shares, worth more than $76 million.
Once again, Greenlight’s bullishness is understandable. EMC Corporation (NYSE:EMC) is an established company, expected to maintain its dominance in the network storage industry for several years to come. A strong cash position, increasing opportunities in the networking industry, decent growth prospects and a relatively cheap valuation, at 20x trailing earnings, make this stock attractive. In addition, the company pays out a dividend yield of roughly 1.5%.
Other funds like Eric Bannasch‘s Cadian Capital, which recently increased its stakes in the company by 25%, to 8.7 million shares, and John A. Levin‘s Levin Capital Strategies (28% increase to 4.5 million shares) also seem to like EMC quite much.
One more new position that Greenlight started during Q4 was Penn National Gaming, Inc (NASDAQ:PENN), a diversified, multi-jurisdictional owner and manager of gaming and pari-mutuel properties, with a market capitalization of almost $1 billion. Offering decent margins, returns and EPS growth prospects (18%-19% per year for the next five) at a decent valuation of 10.8x P/E, this stock certainly looks attractive. Although this is one of Einhonrn´s smallest holdings, comprising less than 0.2% of his portfolio, the acquisition reflects some bullishness.
Besides Einhorn, insiders at Penn National Gaming, Inc (NASDAQ:PENN) are also betting on its future. Saul Reibstein, Sr. Vice President and Chief Financial Officer, acquired the company’s stock twice over the past few months. Last Nov. 27th, he acquired 500 shares for $14.47 each. Then, on Feb. 18th, he augmented his stakes again, by 451 shares, for a total of 2,800 shares.
Yet another small holding of Einhorn’s that is worth mentioning is Fifth Street Finance Corp. (NASDAQ:FSC), a $1.3 billion market cap specialty finance company. Although Greenlight’s holdings in this company saw no activity over 2013’s fourth quarter, its $24 million stake (almost 2 million shares) should not be discounted. Neither should we ignore the four insider purchases that the company witnessed last December. Between Dec. 2nd and Dec. 13th, Bernard Berman (President & Secretary), Richard Dutkiewicz (Director), Ivelin Dimitrov (Chief Investment Officer), and Leonard Tannenbaum (CEO) all bought stock from the company. Let’s take a look at the details:
– Tannenbaum acquired 20,000 shares at $8.98 and now owns more than 2 million shares
– Dimitrov bought 1,000 shares at $9.38, 500 shares at $13.50 and 467 shares at $13.40
– Dutkiewicz purchased 250 shares at $9.35. He now holds more than 10,500 shares.
– Berman bought 1,000 shares at $9.39. His holdings add up to almost 22,000 shares.
There were two companies that Einhorn reduced his stakes in but that still witnessed insider purchases: DST Systems, Inc. (NYSE:DST) and Einstein Noah Restaurant Group, Inc. (NASDAQ:BAGL). Moreover, his sales should not be necessarily interpreted as a bearish signal, since his remaining holdings in these companies are worth roughly $200 million. Given his portfolio is worth roughly $7.3 billion, the importance of these positions should not be underestimated.
DST Systems, an information processing and computer software services and products provider with a market cap of $4.0 billion, saw Einhorn´s position decrease by 30% over Q4. However, his 1.2 million shares, worth approximately $105 million, still signal plenty of bullishness. Furthermore, other funds like Ric Dillon´s Diamond Hill Capital, and Glenn Russell Dubin´s Highbridge Capital Management, also seem quite fond of DST.
In addition, Lowell Bryan, Director, Chairman of the Corporate Governance/Nominating Committees, and a member of the Audit / Compensation / Finance Committees at DST Systems, Inc. (NYSE:DST) made six separate stock purchases over the past six months. Starting in September, 2013, he added more than 1,400 shares to his holdings, at prices ranging from $75.55 to $91.49 per share. He now owns 11,027 shares of the company.
Finally, Einstein Noah, which also witnessed a 27% decrease in Einhorn´s position, still remains an important part of the fund´s holdings. Holding 6.7 million shares, worth almost $100 million, Greenlight still seems to feel bullish about the company. The same goes for Edna Morris, Board Director, who acquired 1,000 shares of the company last December, increasing her holdings to 2,990 shares.
Disclosure: Javier Hasse holds no position in any stocks mentioned