Insiders Who Find Their Stock To Be Undervalued - Weekly Update (04/24/20 - 04/30/20)

Summary

• Picking the right stocks in this market environment has become increasingly important. Following insider purchases can help investors to outperform the market significantly.
• Each week, I provide two lists of insider purchases based on purchase value and market cap.
• Also I suggest a favourite pick each week. This week, I like Abbvie based on its shareholder value creation, high dividend yield,  long term growth opportunities and low valuation.

Over the last week, the S&P500 gained 4.10% on the reopening of many countries and some states of the USA their economies and stronger than anticipated earnings from tech giants Alphabet (GOOGL) and Microsoft (MSFT). Also, the FED announced to keep interest rates at 0% until the economy recovers and keep providing unlimited liquidity. It is a market of stocks, not a stock market, in which it is getting increasingly important to pick the right stocks. Following insider purchases can help with that as there is ample literature available which proves that these stocks outperform the market significantly, as shown in the list below. My own academic research indicates that insiders trades may reach an annual abnormal return of up to 13.25%. In this article, I want to give an update of insider purchases over the last week by providing two lists based on the highest value purchased and highest market cap and discussing them quickly. Moreover, I will thoroughly discuss my favourite pick of this week. By these type of articles, I try to provide valuable information to readers on how to outperform the market.

(Source: Robbe Delaet based on papers included)

List of highest market cap insider purchases

In this section, I will provide a list of the 10 insider purchases with the highest market capitalisation:

• AT&T's (T) director Geoffrey Y Yang purchased $198K worth of stocks last week, following the recent purchase of director Luczo. AT&T is multinational which provides telecommunication, media, and technology services worldwide. AT&T believes that with its newly introduced streaming service, it will approach people who want to both streaming apps and traditional pay-TV services. AT&T is attractively valued at a FCF yield of 11.73% (based on 2019 numbers) and a dividend yield of approximately 7%. The company also has a very stable cash flow stream, which I like a lot. AT&T's CEO Stephenson retired recently after having served for 13 years and will be replaced by COO John Stankey. Many investors are happy about the replacements and the director purchases could indicate that a bottom is near.
• Coca Cola's (KO) Chief People Officer and SVP Lisa Chang bought $77K worth of shares last week. Coca Cola is the biggest worldwide soft drink manufacturer and has Warren Buffet's Berkshire Hathaway (BRK.B) as majority shareholder with >9%. The company looks to be pretty expensive at a FCF yield of 4.26%. However, it could be a good stock for dividend investors with a forward dividend yield of 3.60%.
• Abbvie's (ABBV) VP and controller Brian L Durking bought $107K worth of shares last month, but purchase was filed last week. Abbvie is one of the biggest worldwide pharmaceutical companies and sells the best-sold drug worldwide named Humira. Abbvie has a very strong return of invested capital of more than 20% and is attractively valued at a FCF yield of 10.49%. Last year, the company announced the takeover of Botox manufacturer Allergan with a transaction value of $63 bln. The takeover is expected to add more than 10% to EPS in the first year and up to more than 20% over the following years. The combined companies generated approx. $19 bln in 2018, making the company a cash flow beast. However, this acquisition will increase debt dramatically, which should make investors more careful. On 1 May, Abbvie announced better than expected earnings together with revenue growth of 10.1% YoY.
• Charles Schwab (SCHW) is a financial services company which provides investment management, products and solutions. The company operates through two segments, Investor Services and Advisor Services. Director Charles A. Ruffel bought $90K worth of shares after recent purchases from other insiders. Charles Schwab looks undervalued, but its 2019 free cash flow was impacted by one-offs.
• Kinder Morgan's (KMI) director William A Smith bought $100K worth of shares last week. Kinder Morgan is an American energy infrastructure company, primarily focusing on gas and product pipelines. Its dividend is attractive, yielding more than 7% at current prices. However, I would not recommend in any energy-related stock right now given the severity of this crisis.
• Delta Air Lines' (DAL) director Jeanne P Jackson bought a significant $580K worth of shares last week as the stock declined dramatically by 59% YTD due to the impact of the Covid-19 virus on the air line businesses.This is an interesting purchase which could indicate that DAL will be able to come out of this crisis better than competitors. The firm expects to have $10 bln of liquidity available at the end of June to go through this crisis. Investing in this stock implies many risks.
• Synchrony Financial (SYF) saw two insider purchases last week: directors Fernando Aguirre and Laurel Richie bought $253K and $26K worth of shares last week as the stock is down 47% YTD. Synchrony Financial offers credit cards and saving products, which makes the company vulnerable during this crisis.
• Ally Financial (ALLY) is a company operating in the financial services industry, providing several finance operations. Its director Mayree C Clark bought $214K worth of shares last week.
• Old Republic International Corp's (ORI) director Aldo C Zucaro bought $80K worth of shares last week. ORI is an insurance organization operating primarily in the USA and Canada. ORI will be impacted by this crisis substantially.

(Source: Robbe Delaet)

List of highest value insider purchases

Next, I will provide a list of the highest insider purchases by value:

• Oric Pharmaceuticals (ORIC) is an oncology biotech which launched its IPO last week. Directors Orbimed Advisors and Carl L Gordon both bough $4.5 mln worth of shares, showing confidence in the company. For now, the firm is not profitable yet.
• Thermogenesis Holdings' (THMO) CEO Xiaochun Xu bought $2.2 mln worth of shares last week. Thermogenesis Holdings is a small-cap which develops technologies for CAR-T therapies and is not profitable yet.
• Accelerate Diagnostics' (AXDX) director Jack W Schuler bought $808K worth of shares last week. Accelerate is a mid-cap provides testing systems for infections, but is not profitable yet.
• Synnex Corporation's (SNX) director Matthew Miau bought $715K worth of shares last week. Synnex is a US-based IT design-to-distribution business process services company which aims to enhance customer-engagement strategies. The company is growing strongly and looks attractively valued at a FCF yield of 13.53%. However, its razor-thin margins make the company more risky than others.
• As said before, Delta Air Lines' director Jackson bought shares.
• Trustco Bank Corp's (TRST) CEO Robert J McCormick bought $384K worth of shares last week. Trustco is a personal an commercial banker focused on checking and savings accounts. The crisis could have a severe impact on the financial industry, which could hurt this stock as well.
• Rbb Bancorp (RBB) is another bank with insider purchasing activity as director James Kao bought $321K worth of shares last week. RBB is a bank which provides checking, savings, and money market accounts.

(Source: Robbe Delaet)

Last favourite pick performances

To give an indication on the type of stocks that I prefer and their performance since my recommendation, I include a list of my favourite picks during the last weeks:

Company name	Recommendation date	% change vs. S&P 500
Mastercard (MA)	03/26/20	-5.20%
Baxter (BAX)	04/04/20	-6.28%
Amazon (AMZN)	04/10/20	+19.23%
Huntington (HII)	4/16/20	-4.55%
Darden restaurants (DRI)	04/24/20	+0.77%

Click to enlarge

This week's favourite pick: Abbvie

This week, there was no stock with insider buying activity in which I believe 100%. However, my favourite pick of the list is the pharmaceutical giant Abbvie. I like Abbvie for four reasons: its shareholder value creation, its high dividend yield, its long term growth opportunities and low valuation.

Shareholder value creation

Abbvie created a lot of shareholder value in the past by increasing revenues and margins significantly. In fact, revenues increased each year since 2011 (first year with SEC filing) and almost doubled since then.More importantly, free cash flows increased even more than revenues during that time frame, which I like a lot.The high return on capital employed ("ROCE") of 17.66% shows that Abbvie's management team is investing shareholders' money efficiently in the right assets to drive long term growth. Moreover, I like its conservative balance sheet with a leverage ratio of approximately 1.

(Source: Robbe Delaet based on company sec filings)

High dividend yield

Abbvie is well known for paying out a significant part of its profits in dividends. In fact, dividends per share increased by a CAGR of 17.82% over the past six years. Right now, the dividend is yielding 5.83% and there is enough room for dividend increases given the expected pay out ratio of 55% and conservative leverage ratio of approximately 1.

(Source: Robbe Delaet based on company sec filings)

Longer term growth opportunities

It is highly probable that Abbvie will be able to maintain its growth trajectory in the coming years based on new product launches (such as Upadictinib and Skyrizi) and the Allergan acquisition which are expected to outweigh patent losses on its highest income from Humira (best sold drug in the world).In 2019, Abbvie announced a major takeover of Allergan (well-known for Botox and other aesthetic products) for a total amount of $63 bln. The megamerger is expected to close at May and would make Abbvie the third-biggest pharmaceutical company worldwide based on operating cash flows.Its increased leverage ratio of approximately 3x as a consequence of this acquisition should not become a major problem given its positive BBB credit rating and strong, stable cash flow generation. Abbvie expects revenues to keep growing by high single digit growth numbers over the coming years, outperforming many other pharmaceutical companies.

(Source: Abbvie presentation)

Valuation

You can buy Abbvie at a very low valuation as a consequence of concerns around Humira future sales declines given that some patents expire in the coming years. However, at a FCF yield of more than 10%, I believe a of negativity is already reflected in the stock price. If Abbvie can deliver on its future growth guidance, the stock could move significantly higher.

As the Allergan acquisition will have major implications for the firm, I would suggest to wait out what the impact is on its financials and leverage ratio.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.