By Jake Mann
In most cases, heavy insider purchasing activity is a signal that outsiders should follow suit and buy a particular stock. According to a number of academic studies, investors who consistently "monkey" or mimic the bullish actions of corporate executives can expect to see abnormal returns between 4 and 6 after the first 12 months of a trade. For more about how to beat the market using this strategy, read Insider Monkey's two-part article on the insider trading anomaly, which explains how to interpret insider trading data.
One company with a significant amount of insider purchasing activity in the past two weeks is Consolidated Edison, Inc. (ED). A 190-year-old mega-cap holding company for various utility businesses in the Eastern U.S., Con Ed - as its known on Wall Street - has a solid history of healthy dividend payments, though it has recently grown faster than its 'secular' billing suggests. Over the past three years, in fact, the stock has appreciated over 60 percent in value, and currently trades around $60 a share. Interestingly, ED recently missed Wall Street's quarterly estimates, though the company may still be a better buy than its competitors.
As mentioned above, insider purchases of ED suggest that outside investors should consider buying in if they haven't already. While most insider purchasing activity consists of one or two shareholders per stock, seven different executives have bought shares of ED since the start of 2012, including some as recently as April 30th. In total, these purchases amount to a little over 1,100 shares at an average market value nearly $59 each. While this number is not staggering, it is important to note that nearly all of these purchases occurred when the stock was trading near its all-time high of $62 a share.
The most prominent ED executives included President S. Craig Ivey, CFO N. Robert Hoglund, and VP/CAO Robert Muccilo. The other four insiders are either regional VPs or members of the company's general council. These actions are important because of three reasons: (1) bullish buying while ED is near its all-time high signals that insiders believe the stock has not hit its peak, (2) the multitude of executives displaying this behavior means that it is not an isolated incident, and (3) the frequency of these transactions only supports their legitimacy as a true expectation of future performance. In fact, it is likely that insider purchases of ED will continue throughout this year - check back here for any updates.
It is also crucial to understand what these insiders are seeing in ED stock, before just blindly mimicking them. For starters, the company has been in the news recently for missing its most recent Wall Street estimates; as first quarter profit shrank 11 percent amidst lower than expected steam and heating revenues. Mostly blamed on a milder-than-usual winter, its obvious that this had an effect on the entire utilities industry, but more on that below. Besides missing profit expectations, ED also reported $3.08 billion in revenues, almost 8.1 percent below estimates. Perhaps more importantly, however, the company still expects to earn $3.75 per share this year - a projection that would be right on line with the Street's. Interestingly, the markets seem to support this forecast, as shares of ED actually rose 37 basis points when earnings were released.
Additionally, cash flow valuation indicators signal that shares of ED are undervalued in comparison to the utilities industry as a whole. With a current P/CF ratio of 5.5X, ED's cash hoard is undervalued in relation to the industry average (6.1X), and its own 10-year historical average (8.7X). Moreover, the company's regional competitors also have higher P/CF ratios when considering Pepco Holdings Inc. (POM) at 6.2X, and Northeast Utilities (NU) at 6.6X; and some of ED's closest national peers like Great Plains Energy Inc. (GXP) at 6.0X, and Westar Energy, Inc. (WR) at 7.1X are also valued higher. This lower valuation is not warranted, as ED has grown its operating cash flow by 31.8 percent and its free cash flow by an astounding 232.4 percent. Seeing as the company already pays a healthy dividend yield of 4.1 percent, it is a great sign that ED is currently sitting on a FCF of $1.17 billion, as this cash will likely be used to pay down debt and possibly increase dividends further.
Looking at the company's P/E ratio tell a slightly different story, as it seems that ED is just a bit overvalued using these metrics. Its current P/E is 17.0X, which is greater than the industry average of 16.5X and competitors POM (16.6X), NU (16.2X), GXP (16.9X), and WR (14.6X), so ED's "buy" puzzle does not fit perfectly together. It should also be noted that the company's total revenue shrank by 2.9 percent last year due to underperforming steam and heating sales from a particularly mild winter, though this - dare I say climate change - also hurt ED's regional competitors. In fact, both POM (-18.9%), NU (-9.6%), which also operate in the Eastern U.S., saw their revenues decrease at quicker rates.
Aside from ED's bullish insider behavior and mostly upbeat quantitative comparisons, some of the most prominent hedge fund managers hold the stock in their portfolios. Michael Messner, Louis Navellier, Brian Stark, and Thomas Lenox Kempner - all of whom have over $1 billion in assets under management - are long GD. It may be wisest for individual investors to follow these managers and the company's executives, as it's possible that Consolidated Edison stock has more room to run past its current price of $60 a share.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.