To create this list we began with a universe of stocks that are being purchased by insiders and institutional investors alike.
First we limited our screen to companies experiencing insider buying with net purchases over the last six months representing more than 1% of share float.
Insider buying usually occurs when employees feel the market is not accurately valuing their company. These transactions are public information, and increases in insider stock purchases can signal future appreciation to investors.
So why six months? Professors James H. Lorie and Victor Niederhoffer showed in a 1968 study (pdf) that when the amount of insider buyers is at least two more than the number of insider sellers "the stock can be expected to outperform the market during the next six months." Furthermore, "insiders tend to buy more often than usual before large price increases and to sell more than usual before price decreases.
We then screened for those stocks with bullish sentiment from institutional investors, with significant net institutional purchases over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these names to outperform into the future.
Finally, we limited our results to companies that are trading below EPS trends. Based on the assumption that P/E is equal to a constant k, increases in EPS should be matched by increases in price. When they don't match up, a mispricing may have occurred.
We screened for stocks with faster growth in EPS estimates than price over the last month, which may indicate that these names are being undervalued.
We were left with 2 companies on our list.
Do all of these signs point in the right direction? Use this list as a starting point for your own analysis.
1. Dole Food Company Inc. (DOLE): Engages in sourcing, growing, processing, marketing, and distributing fresh fruits and vegetables, and food products to wholesale, retail, and institutional customers worldwide.
- Market cap at $934.39M, most recent closing price at $10.46.
- Net institutional purchases in the current quarter at 7.2M shares, which represents about 13.81% of the company's float of 52.12M shares. - Top owners are Dimensional Fund Advisors LP (4.97%) and AllianceBernstein, L.P. (4.57%)
- Over the last six months, insiders were net buyers of 4,228,484 shares, which represents about 8.11% of the company's 52.12M share float.
- The EPS estimate for the company's current year increased from 0.52 to 0.6 over the last 30 days, an increase of 15.38%. This increase came during a time when the stock price changed by -1.47% (from 10.9 to 10.74 over the last 30 days).
DOLE has returned -6.10% since 4/5/13, and is one of the worst performing stocks in its industry. The stock is falling behind companies like Chiquita Brands International Inc. (CQB) and The WhiteWave Foods Company (WWAV), which returned 14.46% and 11.24% during the same time period.
Furthermore, earnings growth looks weak, with EPS growing by -101.72% over the last year. Compare this to The WhiteWave Foods Company (EPS growth over the last year at 16.70%).
Motley Fool adds that a "recent high EV multiple might restrain investors from initiating a long position in Dole Food at its current price."
Rumor has it Dole has set the rate on $625 million of loans it's seeking to refinance debt. According to Bloomberg "A $500 million term loan B and $125 million delayed-draw piece, both due in seven years, will pay interest at 3 percentage points to 3.25 percentage points more than the London interbank offered rate, with a 1 percent minimum on the lending benchmark."
2. Tempur Pedic International Inc. (TPX): Distributes bedding products worldwide.
- Market cap at $2.84B, most recent closing price at $45.44.
- Net institutional purchases in the current quarter at 7.3M shares, which represents about 15.31% of the company's float of 47.69M shares. Top owners are FMR LLC (15.32%) and Chieftain Capital Management, Inc. (12.5%).
- Over the last six months, insiders were net buyers of 590,915 shares, which represents about 1.24% of the company's 47.69M share float.
- The EPS estimate for the company's current year increased from 2.59 to 2.94 over the last 30 days, an increase of 13.51%. This increase came during a time when the stock price changed by -1.69% (from 49.63 to 48.79 over the last 30 days).
TPX has returned -0.73% since 4/5/13, and is one of the worst performing stocks in its industry. The stock is falling behind companies like Fortune Brands Home & Security, Inc. (FBHS) and Select Comfort Corporation (SCSS), which returned 15.36% and 13.62% during the same time period.
In addition to trading below EPS trends over the last 30 days, TPX has a lower than average projected earnings growth rate over the next 5 years (12.43%). This is significantly below the analyst projections for Mattress Firm Holding Corp. (projected EPS growth over next 5 years at 23.25%) and Fortune Brands Home & Security, Inc. (projected EPS growth over next 5 years at 21.17%).
Tempur-Pedic narrowly beat estimates on May 2 with adjusted first-quarter profit of 62 cents per share versus expected profit of 61 cents per share. The recent acquisition of Sealy Corp. helped the firm beat market forecast. CEO Mark Sarvary expects the integration of Sealy to go smoothly.
Headline sentiment ranking from Contextuall paints an optimistic picture. TPX has a 43% positive sentiment rating versus 6% negative (51% neutral). Many firms have chimed in with optimistic target prices and ratings. Wedbush raised target price from $33 to $48. Barclays put their target at $47, KeyBanc analysts at $58. This is a potential upside of 5.6%, 3.4% and 27.6% respectively.
*Institutional data sourced from Fidelity, target price data sourced from Thomson/First Call (via Yahoo! Finance), all other data sourced from Finviz.