By Guan Wang
In order to regulate insider trading on material non-public information, the SEC requires corporate insiders to report their transactions within 48 hours. While these transactions may not be made on material non-public information, they are still worth looking at. In general, corporate insiders know more about their own companies and their respective industries, so they are more likely to beat the market compared with ordinary investors.
In this article, we are going to take a closer look at a few large insider purchases recently. All companies have market caps of at least $10 billion and the transactions were all filed with the SEC between May 7 and May 11, 2012.
Microsoft Corp (MSFT): On May 8, Director Stephen Luczo purchased 16,000 shares of Microsoft at $30.72 per share. The transaction was reported to SEC on May 9. Microsoft was closed at $31.15 on May 11.
We like tech stocks such as Apple Inc (AAPL), Google Inc (GOOG), and Microsoft. Hedge funds love these tech giants too. Microsoft is one of the most popular stocks amongst the 350+ hedge funds we track. At the end of last year, there were 95 hedge funds with Microsoft positions in their 13F portfolios, including Boykin Curry's Eagle Capital Management and David Einhorn's Greenlight Capital (check out David Einhorn's top stock picks). Einhorn thinks that Microsoft isn't getting enough credit for some of its achievements and prospects, and we agree with him.
The company is currently trading at a P/E ratio of 11.3, a discount to its industry's average of 24. We think this valuation level is attractive as Microsoft has a decently high expected earnings growth rate of 8-9%. Moreover, while the growth rate is relatively low compared with that for Apple (AAPL) or Google (GOOG), which are expected to grow at nearly 20%, Microsoft is a good option for contrarian investors as it does not need to achieve extremely high growth to beat market expectations.
American International Group Inc (AIG): Over the past week, there were three insiders who purchased AIG shares. On May 7, Director Laurette Koellner bought 7,825 shares at $31.81 - $31.82 per share. Koellner bought thousands of AIG shares earlier in November last year when the stock was trading at $21-22 per share. Director Morris Offit bought 10,000 shares at $31.70 - $31.71 per share on May 7. Offit also purchased over 10,000 shares of AIG at around $28 per share in late February. Director Christopher Lynch purchased 3,125 shares at $31.68 on May 7 and 45 shares at $31.86-31.90 per share on May 8. AIG closed at $31.75 on May 11.
Hedge funds like AIG too. As of December 31, 2011, 21 hedge funds reported owning AIG in their 13F portfolios. Bruce Berkowitz was the most bullish money manager about AIG. His Fairholme had more than $2 billion invested in the company (check out Bruce Berkowitz's top stock picks). Larry Robins' Glenview Capital is also a fan. It had $169 million invested in AIG at the end of 2011.
On May 7, the U.S. Treasury announced that it has plans to sell $5.8 billion of AIG shares. After the huge mortgage and CDS losses in 2008, AIG was forced to accept credit from the government. The company has been making progress since then and its financial situation has improved. It has been continuously paying down the debt and the U.S. Treasury has been selling its stakes in AIG since last year. Its stake in AIG will be reduced to 61% after this transaction is completed. AIG is currently trading at 8.6X its 2012 earnings, a discount to its industry's average as well as its historical average. It also has a strong ROE of 28.72%, while most of its peers only have single-digit ROEs. Overall we think it makes sense for investors to follow insiders and hedge fund managers and invest in AIG.
Valeant Pharmaceuticals International Inc (VRX): On May 7, ValueAct Holdings LP purchased 419,000 shares of Valeant at $51 per share. The stock closed at $52.94 per share on May 11. Earlier in March, Valeant's EVP and CFO Bradley Howard Schiller purchased 27,800 shares of the stock at $53-54 per share (see our previous article about Schiller's transaction). Though the stock lost about 1.5% over the past two months, it still outperformed the market, which was down 2.65% in the same period.
Other Companies: Insiders also purchased 10,100 shares of Emerson Electric Co (EMR) on May 2, and 7,000 shares of ONEOK Partners LP (OKS) on May 3 and another 1,000 shares on May 9. We like Emerson. The company has better-than-average revenue growth and EPS improvements. Its ROE of 22% is also higher than the average of its peers. We like ONEOK too. We are favorable about the company's growth prospects. The company spent $1.06 billion in capital expenditures last year and plans to spend $1.86 billion in growth capital expenditures this year.
Disclosure: I am long MSFT.