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Everyone knows that insider buying is probably the most bullish indicator that a stock is undervalued. And usually those trades make the headlines within minutes of the SEC filing. However, some of those transactions can be buried in a bunch of option "mumbo jumbo," never to be found. It takes extremely diligent detective work to find these transactions. This week some were uncovered concerning Dillard's (NYSE:DDS). According to an article Saturday December 15th:

On Nov. 27, CEO William Dillard II and his younger brother President Alex Dillard each exercised stock options to buy half a million shares at the exercise price of $25.74, or a total cost of $12.87 million. On the same day, each man then sold 299,972 shares at $87.98 per share, bringing in $26.4 million for shares that only cost them $7.72 million and leaving each with new shares instantly worth $17.6 million and generating more than $1 million from the special dividend. Nice.

This can be verified by SEC filings on November 29, which also show similar activities for other Dillard family members and insiders which the article goes on to mention. Earlier in the week, Jonathan Moreland wrote an article about several companies including Dillard's, where insiders only sold part of their options granted. He considers this type of activity extremely bullish for any company. As you can see from the share price history at Yahoo Finance, this news was missed:

DateOpenHighLowCloseVolumeAdj Close*
Dec 1482.5683.3082.2682.30428,00082.30
Dec 1383.9784.1982.5682.90339,40082.90
Dec 1284.6684.6683.3283.82627,20083.82
Dec 1184.5084.8483.4184.23648,70084.23
Dec 1084.4584.7683.5284.45795,00084.45
Dec 783.9085.4783.3984.69901,10084.69
Dec 683.2684.2582.9683.37605,80083.37
Dec 584.2784.2781.1583.04763,90083.04
Dec 55.05 Dividend
Dec 488.9189.4088.2588.92731,60083.87
Dec 389.2789.9888.7589.01552,70083.95
Nov 3089.4589.9388.6388.91677,90083.86
Nov 2989.0089.4288.0189.05620,50083.99
Nov 2887.5089.3087.5088.98828,20083.93
Nov 2787.9188.7187.2587.72980,50082.74
Nov 2686.5286.5284.4385.84547,20080.96
Nov 2386.1586.8085.8086.44256,60081.53

As a matter of fact, the news on November 26, that Dillard's would pay a special dividend of $5 a share, along with the regular $0.05 dividend to shareholders of record on December 7 had little impact on the share price which closed down that day at $85.84. One reason is there were a handful of articles recommending that investors short the stock, ironically, on November 29 when the insider trading had just been made public. However, the big money did not listen to the Bears, and most shorts bailed, according to nasdaq.com:

Settlement DateShort InterestAvg Daily Share VolumeDays To Cover
11/30/20122,109,680535,0723.942796
11/15/20122,206,387571,3683.861587
10/31/20122,273,551382,1045.950084
10/15/20122,526,234424,1755.955641
9/28/20122,571,907479,7185.361289
9/14/20122,703,164399,9446.758856
8/31/20122,948,502390,8817.543222
8/15/20123,739,305691,5275.407316
7/31/20123,642,008666,2605.466346
7/13/20123,960,926706,6135.605510
6/29/20123,888,500707,6065.495290
6/15/20124,260,336803,2495.303880
5/31/20124,446,274851,2965.222947
5/15/20125,559,3281,530,7533.631760
4/30/20127,391,806583,89912.659391
4/13/20127,663,352654,79111.703508
3/30/20128,029,101655,03012.257608
3/15/20127,223,852927,3267.789981
2/29/20127,146,7941,331,1325.368960
2/15/20128,364,940828,43810.097243
1/31/20128,355,544654,58112.764721
1/13/20128,815,4471,157,7067.614582
12/30/20117,538,819886,8938.500258
12/15/20116,600,7531,016,3186.494771


This is the lowest the short interest has been this year. One of the reasons is that anyone that shorted the stock is "on the hook" for the dividend. This means that investors that were still on that "short list" on December 4 had to pay out $5.05 for every share that they shorted. The total is a cool $10 million. This is a minor detail that was left out of those "shorting" articles. There are many other reasons to be long on Dillard's which has continued to grow over the past several years:

Chart forDillard

At this time, most analysts recommend holding the stock. Ironically, since I have been following Dillard's over the last ten years, the analysts' consensus has been to Hold. It has been rated a Hold the entire time that it jumped from between $2 and $3 a share up until now. However, there have been some analysts that broke away from the pack one way (buy) or the other (sell) over the last few years. However the consensus has continued to be Hold. Right now, the median price target is $93.50, which is more than $10 over the current price of $82.30. According to Barrons:

Stock Price Targets

High:$95.00
Median:$93.50
Low:$90.00
Average:$93.00
Current Price:$82.30

I really expected a short-term drop on December 5th as the shares went ex-dividend. However, as you can see from the chart above, the price only dropped the amount of the dividend. And I expected some selling due to the fiscal cliff, and the threat of higher capital gains taxes in 2013. However that did not happen. Now I wonder if there were a lot of the professional investors and fund managers that knew about the insider buys, but kept "mum" as they continued to quietly accumulate the stock. Right now according to the latest numbers from NASDAQ, 92.49% of Dillard's outstanding shares are owned by institutions.

As I mentioned in another article, the shares will probably pop again when the dividend is distributed. This is because many people will re-invest that money back into the stock. Watch for millions of dollars more in "covert" insider buying when this occurs. I have owned this stock on and off for years. But this is getting too interesting to sell right now, so I plan to hold until there is more news. If the analysts are right, the high target of $95 would offer a 15% profit, which would be a nice trade. But, I definitely would not short this stock with the top insiders buying.

Disclosure: I am long DDS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Dillard's Under The Radar: Insiders Make Big Option Plays