By Guan Wang
We have been recommending ordinary investors focus on stocks with notable insider purchases. Investors can always get some idea what stocks are popping by looking at insider transactions, although they do not necessarily indicate "buy" or "sell". Additionally, we believe insider purchases are much more informative than insider sales, as the latter is often 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 over the past week. All companies have market caps of at least $10 billion.
Hewlett-Packard Company (HPQ): On May 30, Director Ralph Whitworth reported to the SEC that he had purchased 13,148,735 shares of HPQ for a total of $295 million, or an average of $22.47 per share. Hedge funds have also been showing some interest in HPQ. At the end of the first quarter, there were 47 hedge funds with HPQ positions in their 13F portfolios. Seth Klarman was the most bullish hedge fund manager about HP. His Baupost Group had $400+ million invested in this position at the end of March. Steven Cohen, Ray Dalio, and Wallace Weitz were also in favor of HPQ (check out Ray Dalio's top stock picks).
Moreover, technology stocks are undervalued as a sector. HPQ is trading at a discount, even when compared with its peers. Its current P/E ratio is 8.24, less than half the industry average of 16.94. However, HPQ's first-quarter financials do not look very attractive. It reported revenue decline of 3% compared with the same quarter last year, while its industry's average revenue growth was 59% for the same period. HPQ's EPS also dropped by 23.8% in the first quarter compared with the same quarter in 2011. Over the past fiscal year, the company reported earning $3.27 a share, lower than the $3.69 realized in the prior year. The good news is that the company's declining earnings trend is expected to reverse. HPQ is expected to earn $4.07 per share this year and $4.41 per share next year.
VMware Inc (VMW): As the largest shareholder of VMware, EMC Corp (EMC) reported on May 29 and June 1 that it had bought 158,000 and 161,800 shares of VMware, respectively, for a total of $30 million, or an average of $93.69 per share. EMC has been continuously increasing its VMware holdings since mid-March 2010. At that time, the stock was only trading at $53 per share. After buying 47,700 shares of VMware at $84 per share on January 9, 2012, EMC suspended its purchase. It restarted the purchase after six months.
VMware has been growing rapidly. For the first quarter of 2012, the company reported an EPS of $0.44 on $1.06 billion revenue, up from an EPS of $0.29 on $844 million revenue for the same quarter last year. Its first-quarter operating margin of 32.6% also beat consensus expectations of 30.6%. Going forward, VMware is expected to continue its strong growth. Analysts expect its earnings to grow at an average of 26% annually over the next couple of years.
VMware was also quite popular amongst the hedge funds we track. As of March 31, 2012, there were 39 hedge funds disclosing to own VMware in their 13F portfolios, up from 33 hedge funds as of December 31, 2011. Jim Simons was the most bullish money manager about VMware. Simons' Renaissance Technologies boosted its VMware stakes by 43% over the first quarter to $177 million (check out Jim Simons' top stock picks).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.