Academic research has shown that stocks with insider purchases actually outperform the market over the following 12 months. The reason is that insiders generally buy deeply undervalued stocks. We observe the same pattern recently. There were insider purchases in low PE stocks like Bank of America (BAC) and Hess (HES). Both of these stocks have forward PE ratios of less than 8.
In this article, we are going to discuss the large-cap stocks with insider purchases during the past week. All companies have at least a $10 billion market cap and were bought by at least one insider over the past week.
Dominion Resources Inc (D) was bought by most insiders over the past week. There are four insiders of the company who purchased D stocks. EVP and CFO Mark McGettrick, director Thomas Farrell, and director Peter Brown all bought 5,000 shares of D on January 31 at about $49.50 per share. Director Mark Kington also purchased 2,800 shares at $49.6602 per share on the same day. D is now trading at $50.38 per share. It seems that the market did not think the insider purchases are significant as D returned about 1.5% since the end of January, compared with 2.45% for SPY. The company is exposed to the risks of a weaker economy and lower electricity prices. Its P/E ratio is also relatively higher compared to its peers. D has a P/E ratio of 19.30, versus 10.53 for American Electric Power Co (AEP) and 15.09 of the average of the electric utilities industry. On the positive side, the company also has a few expansion and growth plans, such as its wind generation expansion project. If the company performs well in these growth projects and efficiently manages its costs, the drop in power prices will be offset. Jim Simons' Renaissance Technologies initiated a brand new $36 million position in D over the third quarter. Charles Clough and Israel Englander are also bullish about D.
Bank of America Corporation (BAC) was also purchased by more than one insider over the past week. Director Donald Powell bought 10,000 shares at $7.7 per share on February 3. Powell also purchased 7,000 shares on January 26 at $7.25 per share. Another director at Bank of America, Susan Bies, also bought 50,000 shares at $7.39 on February 1. BAC is now trading at $7.84 per share. The stock returned 6.09% since February 1st, outperforming the SPY by five percentage points. BAC is a very popular stock among hedge funds tracked by us. At the end of September, there were 75 hedge funds with BAC positions in their 13F portfolios. For example, John Paulson's Paulson & Co. had nearly $500 million invested in BAC at the end of the third quarter. Bruce Berkowitz, Philippe Jabre, Mohnish Pabrai and Curtis Macnguyen are also bullish about BAC. We agree with these hedge fund managers. Because of the market turmoil, analysts usually have low expectations for financial stocks. BAC also has an attractive forward P/E ratio compared to its peers. Most financial stocks are trading at low P/E ratios right now, as most of them plunged because of the European debt crisis. BAC has the lowest forward P/E ratio of 7.00, compared with 7.11 for Citigroup Inc (C), 7.14 for JPMorgan Chase (JPM) and 8.48 for Wells Fargo (WFC).
Hess Corp (HES) also has large insider purchases. Director John Hess purchased 91,250 shares of HES at $54.7881 per share on January 30. HES is currently trading at $60.38 per share. It was up 10.21% since John Hess' purchase, while the market returned only 2.41% since then. We like HES. There were 30 hedge funds with HES positions at the end of the third quarter. For example, Steven Cohen's SAC Capital Advisors had $120 million invested in HES at the end of September. The company has some investments in politically troubled locales. However, that risk is offset by its diversified business in the energy industry and its low cost structure in the exploration and production segment.
There were small insider purchases in BlackRock Inc (BLK), E. I. du Pont de Nemours and Company (DD), General Electric Company (GE), Starbucks Corporation (SBUX), Charles Schwab Corporation (SCHW) and US Bancorp (USB) during the past week. Except USB, which was bought by another insider on January 24, other stocks do not have any other purchases earlier this year. Imitating insider purchases is usually more profitable when there are several insiders purchasing. However, insider purchases in large-cap stocks is a rare event, which is why we pay attention.
Disclosure: I am long C.