By Guan Wang
One of the most effective strategies for narrowing down which stocks to analyze is to look at stocks with large recent insider purchases.
The reason is simple.
Insiders tend to know their companies much better than outside investors and sometimes they have material non-public information. This enables insiders to make better decisions regarding the buying or selling of their companies' stocks. Insider purchases are especially informative while insider sales are sometimes motivated by liquidity or diversification needs.
In this article, we are going to take a closer look at a few large insider purchases reported to SEC from April 2 to April 4. Insider purchases and sales are required to be reported within two days of the transactions. This means that these transactions were completed at the end of March and at the beginning of April. It isn't too late to imitate these transactions. Insiders buy these with the knowledge that they have to hold these stocks for at least 6 months. Here are some of the largest purchases made by insiders:
Cracker Barrel Old Country Store Inc (CBRL) Sardar Biglari, large shareholder of Cracker Barrel, reported on April 4 that he purchased 50,100 shares of the stock for a total of $2.8 million, or $56.26 per share. The stock is currently trading around $56.60 per share. There were a few hedge funds bullish about Cracker Barrel as well. For example, Ken Griffin's Citadel Investment Group had $2.3 million invested in this stock. Israel Englander and Joel Greenblatt were also in favor of Cracker Barrel.
Cracker Barrel's EPS slightly decreased from $3.62 per share in 2010 to $3.60 per share last year. Despite its declining EPS, the stock's performance was strong over the past year. Over the past 52 weeks, Cracker Barrel was up 18%, beating the market by over 10 percentage points. Although its price grew faster than the index in the past year, the stock still has some upside potential. We think the negative growth trend of its EPS will reverse in the future. The market expects the company to make $4.30 per share this year and $4.64 per share next year, versus $3.60 per share last year. Analysts also expect the company's long-term earnings growth to be about 10% per year. The company's forward P/E ratio is about 13, a significant discount to the industry average of 23.
Spectrum Brands Holdings Inc (SPB) Phil Falcone's Harbinger Capital Partners, a large shareholder of Spectrum Brands, has been continuously purchasing the stock over the past couple of months. The most recent purchase was reported to SEC on April 3. Harbinger purchased 105,100 shares of Spectrum Brands for a total of $3.7 million, or $34.97 per share. The stock is currently trading at $33.92 per share. We recommended investors to purchase the stock a month ago, when we noticed Harbinger purchased 249,900 shares of the stock at $29 per share on March 7. The article was posted on March 19, when Spectrum Brands is priced at $31.45 per share. If investors had followed our advice, they could have made 7.85% so far from this position, while the market was down 1.46% during the same period.
We are still bullish about Spectrum Brands at the moment. The company is still trading at a discount despite its recent strong performance. It is expected to earn $2.47 per share in 2012, which means its forward P/E ratio is about 13.74, versus the industry average of 16.92. Spectrum Brands' major competitors include Procter & Gamble (PG) [PG0 and Energizer Holdings Inc (ENR)]. Spectrum Brands' 2013 earnings expectation is $2.66 per share, making its 2013 P/E ratio about 12.75, versus 10.64 for Energizer and 15.45 for Procter & Gamble.
Over the long term, both Energizer and Spectrum Brands are expected to grow at over 10% per year, while Procter & Gamble's growth expectation is about 8% annually. However, this does not mean that we do not like Procter & Gamble. On the contrary, we think it is a good investment as the company has a leading position in the industry and a stable business. Investors can also benefit from its decent dividends and its share repurchase program.
Other insider purchases reported to SEC earlier this month include 45,000 shares of Opko Health Inc (OPK) and 11,000 shares of Vera Bradley Inc (VRA). These insider purchases and the companies' market caps are smaller than those of Cracker Barrel and Spectrum Brands. As the large shareholder, Bank of America (BAC) also bought 57,000 shares of HCA Holdings (HCA) on April 2. But they instantly sold the same amount of the stock. Therefore, we do not think these insider purchases deserve a closer look at this moment. But, we will be tracking these stocks closely and report any additional large insider purchases in the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.