Philip Morris: Follow The Insiders

May.14.12 | About: Philip Morris (PM)

The market has almost had its wings clipped the last few weeks, after flying high in the first quarter of 2012. But the summer pullback almost everyone expected could present nice buying points for stocks that have been on a roar. Would you not want to buy a strong dividend and capital growth stock at close to 4% yield level? Or at a price that is lower than what an insider paid for it recently? Its hard to imagine no for an answer here.

As we keep stressing in our articles, insiders sell for various reasons but insiders buy just for one reason. They believe and almost know the stock is undervalued and is set to move up. While there are always exceptions, the majority of direct insider buys have been followed by an increase in the share price.

  • Our favorite tobacco stock, Philip Morris (NYSE:PM) is one of the few stocks out there with consistent insider buying.
  • Sergio Marchionne, CEO of Fiat is on the Board of Directors of PM. He is credited with having turned around both Fiat and Chrysler. So one can safely assume that he knows what is good for business and where and how to spend money.
  • And boy isn't he bullish on Philip Morris. He has made 16 direct stock purchases between May 2010 and May 2012 as shown in the table below.

  • The last column in the table lists the 3 month price action following each of Mr. Marchionne's buys.
  • The average price increase over the 90 days following his purchases is about 7%, without including dividends.
  • There have been some insider selling as well but Mr. Marchionne has been the most consistent direct open-market buyer and does not have even a single sell activity.

Conclusion: They say do not fall in love with your stocks. But it is hard to not fall in love with a stock with great fundamentals, fantastic dividend growth potential and which is also backed by insiders who believe the stock is undervalued and puts their money to work. We believe the stock is a buy any time it enters the oversold region. The summer swoon might present great entry points. Keep watching !

Disclosure: I am long PM.