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By Matt Doiron

According to economic theory, company insiders are incentivized against buying stock as it increases their company-specific risk. Therefore, in theory, observing purchases should mean that these insiders are confident enough in the business's prospects to overcome this factor; in fact, studies do generally show an outperformance effect for stocks bought by insiders, particularly if multiple insiders have been buying (read our analysis of studies on consensus insider purchases).

We can screen stocks for those which have been bought by multiple insiders recently, as well as consulting our database of quarterly 13F filings to see which of these stocks are also widely owned by hedge funds and other notable investors. We track 13Fs as part of our work developing investment strategies, including our finding that the most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year on average in our backtests (learn more about our small cap strategy). This strategy's monthly alpha using Carhart's four factor model (this model adjusts for risks originating from size, value, and momentum factors) was also 120 basis points. Here are the most popular stocks among hedge funds which at least two different insiders have bought in the last three months:

Multiple insiders have been buying Delta Air Lines (NYSE:DAL), including one purchase which came after federal regulators' recent decision to challenge the merger of US Airways and American Airlines (markets, which had expected the deal to increase industry consolidation, sent airline stocks generally down on the news). Conditions have actually been improving somewhat for Delta, and analyst expectations imply a forward earnings multiple of only 6. Billionaire David Tepper's Appaloosa Management has been bullish on the industry, and owned over 10 million shares of Delta in its most recent filing (find Tepper's favorite stocks).

Our database includes 60 hedge funds and other notable investors with positions in Hess (NYSE:HES) as of the end of June. Earlier this year Hess had announced plans to spin out its downstream operations in order to better focus on exploration and production; spinouts often result in increases in shareholder value due to improved operations. We've also recorded multiple company insiders buying the stock in the past few months. Wall Street analysts are projecting $5.97 in earnings per share next year, resulting in a forward P/E of 13; that would certainly place Hess in value territory if it could generate earnings growth.

Philip Morris (NYSE:PM) is another stock which insiders have been buying and which is also fairly popular among hedge funds. As with many cigarette companies, Philip Morris pays a high yield; in fact, the 4% annual yield is lower than what can be found at some of its peers including sibling company Altria. In theory, Philip Morris needs to retain more of its cash in order to fund growth opportunities as it is more focused on less mature international markets. However, in the second quarter of 2013 both revenue and net income declined somewhat versus a year earlier.

Since the beginning of August, two Board members have each invested over $100,000 in Time Warner (NYSE:TWX); our database shows 55 filers with positions in the media and entertainment company at the end of Q2. The trailing and forward P/Es of 17 and 14, respectively, are in line with the valuations of similar companies as is the fact that Time Warner generated good growth numbers on both top and bottom lines in its most recent quarter compared to the same period in the previous year. Between this decent valuation and the insider interest it could be an attractive prospect.

The fifth most popular stock meeting our criteria for multiple insider purchases is Valeant Pharmaceuticals (NYSE:VRX). The pharmaceutical company, which develops drugs and also provides generic drugs, is up over 90% in the last year as markets are optimistic about its products in development and the recent acquisition of Bausch & Lomb. In fact Valeant's sales did rise considerably last quarter compared to the second quarter of 2012, by over 30%, though over the last year the company's earnings have been less appealing. Following its most recent quarterly report, management increased its guidance.

Source: Hedge Funds And Insiders Are Buying These 5 Stocks