Insider transactions can give investors the best insight into future performance of a company. Because let's be honest, if you were the CEO of a company you wouldn't sell shares if you knew that business was substantially improving. But on the other hand, you wouldn't buy shares just before you released earnings that missed expectations by a large margin. Executives and CEO's are business people and most have strong ties to the market from previous ventures. Therefore they are good investors and make decisions based on logic and stock position compared with the actual value of a company. Yet as investors we try to downplay the meaning of insider transactions and make excuses as to why an executive would sell $50 million worth of stock. But the truth is the executive usually wins and knows what's coming before it happens. Therefore we should pay close attention to the investing tendencies of the executives of stocks that we own.
Last week I wrote an article on three executives that sold a large amount of shares just before a company's stock fell. The purpose of the article was to show three different examples of how insider transactions can inform us of what's to come in the future. And although the situation was much different with each executive the end result was the same, which was a falling stock. CEO's and executives are investors that have insider knowledge of their company's fundamental performance. They have the same information that we have plus all the information related to the ins and outs of daily operations to make a better investment decision. An executive will sell if the stock is trading high above earnings and take profits. But sometimes the executive will buy if he or she believes the stock is presenting value and has fallen for some reason despite growth within the company. As a result we will be looking at 6 companies with executives that are telling us that the future is bright at their companies with hefty insider purchases. Each of these companies have had strong insider buying over the last few months, which could indicate that the company has improved by some margin. Because I know that if I were a CEO I wouldn't buy shares if my company was troubled and I believe this fact could be one of the best indicators of what's to come. Below are 6 companies with significant insider purchases over the last few months along with a look at each of the companies.
|Company||Ticker||Executive||Date Range||Shares Bought|
|Valeant Pharm||VRX||Michael Pearson||8/1-8/16||155,642|
|Smithfield Foods||SFD||Larry Pope||9/13-10/6||27,169|
|Kronos Worldwide||KRO||Harold Worldwide||9/14-10/26||32,900|
|Huntington Bancshares |
|Stephen Steinour |
Harold Simmons the Chairman of Valhi (VHI) has acquired additional shares since June of 2010 in this remarkably fast growing company. I believe this shows his confidence in the company since you rarely see an executive purchase shares in a stock when it's trading more than 50x earnings. Yet Valhi is on track for its best financial year in the history of the company by posting $200 million during the last 12 months above 2010's revenue. The company has significantly increased its earnings with $52.4 million during its most recent quarter compared with $4.5 million year-over-year. Yet I believe the company's greatest achievement has been the progress on its balance sheet including increasing its cash by more than 300% year-over-year and significantly decreasing its debt-to-assets ratio. Therefore I believe that Simmons has made good investment decisions and that it should be an indication of what's to come for this company.
The CEO of Valient Pharmaceuticals (VRX) Michael Pearson increased his position by a substantial margin in early August after the sell-off within the market caused the stock to drop by more than 25%. I believe that Pearson's purchase is one of the best executive moves of the last year and further proves my point that executives are great investors along with being great leaders. Early this year VRX was a momentum stock trading at prices near $60 but at $38.50 VRX is now a value stock with a price-to-earnings of 11.50. And regardless of analyst expectations or FDA decisions there is one fact that remains true regarding this company; it's a fast growing company (with revenue that more than doubled last quarter and earnings that nearly doubled). And what's more encouraging is that Pearson is not the only insider purchasing shares in this company. It's actually been one of the most active stocks since August with several insiders purchases, which should indicate that earnings and performance will only get better for this fast growing company.
Smithfield Foods (SFD) is a consistent company that improves both revenue and earnings on a regular basis. The industry as a whole has performed quite well over the last six months with several of its competitors trading near 52-week highs. And although SFD is also trading near 52-week highs the stock is only trading at 7x earnings, which I believe presents value. The stock is not a momentum stock nor is it growing by some insane margin that's impossible to maintain. But rather it's a model of consistent growth and I believe that by Pope increasing his position, along with several insiders, it should be a sign of encouragement to investors that its 32% year gain should continue and that it will continue to grow at a consistent rate.
Kronos Worldwide (KRO) is very similar to SFD in trading metrics with a P/E of only 11 and a beta that is more volatile than the market. However it's much different in fundamental performance such as its large margin of gains in revenue, earnings, and operating margins. The company has great returns on both equity and assets and has more cash year-over-year. In addition the company has improved its debt-to-assets ratio by nearly 25% over the last twelve months, which I believe is amazing considering its increased cash position. Therefore this company has all the characteristics of efficiency with management that has cut cost yet increased production. And since its chairman has increased his position over the last month I believe it's safe to say that KRO would make a good investment, especially considering it has only returned a 9% gain over the last 12 months despite its impressive fundamental improvements.
Huntington Bancshares (HBAN) is one of the stronger regional banks that trade within the market. It has a book ratio of 0.90 and a low percentage of delinquent loans compared with others in the industry. Its exposure to debt is limited since most of its locations are in strong regional areas of the country. Yet despite these facts along with incredible fundamental improvements over the last two years its stock has lost 22% over the last 6 months. I believe that HBAN presents more value than the majority of stocks within the market and with a P/E of 10.4 the CEO of Huntington Stephen Steinour agreed and capitalized on its downtrend during the sell-off within the market during August.
Ford Motor Company (F) is very similar to Huntington as an undervalued stock in an industry that is growing faster than nearly any industry in the market. This company has significantly increased its sales over the last year, plans to reinstate a dividend, and expects sales to increase 50% by 2015 yet its stock has lost 33% of its value year-to-date. And the chairman William Ford who already owns a large position in the company increased his position when the stock reached 52-week lows. Therefore as a man who has no need to increase his position it should further add to the value of this company that he saw a position that was simply too good to pass up.
Insider trends can be viewed on Yahoo, CNBC, etc
Disclosure: I am long HBAN.
Disclosure: Insider trends can be viewed on Yahoo, CNBC, etc. As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.