Insiders Not Excited

4/9/2012


The S&P 500 Index has rallied 26% over the last six months, but corporate insiders don't deserve any credit.

According to TrimTabs Investment Research, February marked the sixth consecutive month in which corporate insiders combined to buy less than $1 billion in stock. While investors shouldn't ignore insiders' lack of enthusiasm, their actions alone should not frighten anyone away from stocks.

A high ratio of insider sells to insider buys is considered a negative indicator, but it is not foolproof. Recent peaks in selling activity occurred in May 2011, about two months before a steep market decline, and October 2011, which proved to be a good time to buy stocks.

Stocks with strong insider buying are scarce these days, but a few bold souls are bucking the trend. The table below lists A-rated companies with at least two insider buys since mid-September (roughly six months of reported data for most companies) and a sell/buy ratio of no greater than 12-to-1. Thomson Reuters considers a marketwide sell/buy ratio of 12-to-1 or lower a bullish sign for stocks. Two buys in six months may not sound like a lot, but in today's market, such purchasing trends stand out from the crowd.

Officers or directors of companies qualify as insiders, as do investors who own 10% or more of a class of company securities. Since insiders already tend to own large blocks of company stock, they sell a lot more than they buy.

Insiders have lots of reasons to sell, including raising cash or rebalancing portfolios. Theoretically, insiders won't buy unless they expect a stock to go up.

Insider buying alone isn't enough to warrant purchasing a stock. But for high-potential stocks like those in the table above and the paragraphs below, insider buying is a nice kicker.

In the past six months, Aflac's ($46; AFL) insider selling has totaled $1.5 million, compared to purchases of about $500,000. These numbers consider only open-market transactions. Last month, Aflac CFO Kriss Cloninger sold 16,000 shares at prices ranging from $45 to $47. However, investors shouldn't read too much into the sales, as in February he exercised options that granted him 100,000 shares. Insiders frequently sell after exercising options, and in the wake of sales in February and March, Cloninger still controls 26,000 shares.

Aflac's last insider buying occurred in late September, when a pair of directors purchased a total of 15,000 shares. The timing of one of the director's purchases proved especially fortuitous; he boosted his holdings when Aflac traded at $31.50, just $0.25 above the stock's lowest price since July 2009.

The insurer faces slowing growth, especially in Japan, where a shifting product mix could pressure profit margins. However, U.S. business has picked up in recent months. The consensus calls for per-share profits of $6.60 this year, up 4%, a conservative target. Aflac trades at less than seven times estimated 2012 earnings, a 22% discount to its peer group. And Aflac's trailing P/E of just over seven hovers near its lowest level in more than a decade. Yielding 2.9%, Aflac is a Buy and a Long-Term Buy.


Dover ($63; DOV) shares have fluctuated between $44 and $70 during the past 52 weeks. To navigate through that volatility, investors would have done well to mimic insider activity. Dover's only two insider buys in the last six months took place in October, when the stock traded near $56. Since then, most of the open-market insider sells have fetched $63 to $67.

As a company, Dover doesn't hesitate to invest in its own shares, or in acquisitions that expand its business. The company, which makes products ranging from refrigeration systems to electronic components to oil-drilling equipment, views acquisitions as keys to its growth strategy. Purchases allow for both expansion of existing businesses and entry into new markets.

The share count has fallen 1% over the last year and 9% over the last five. Dover spent more than $1.7 billion to purchase 21 businesses from 2009 to 2011, while selling four businesses for a total of $517 million. The strategy appears to be working, with Dover's return on assets climbing above 9% last year, the highest level since 2000.

Management sees revenue advancing 10% to 14% annually through 2014, with 7% to 9% of that growth organic. The company expects free cash flow to reach more than 10% of annual sales, a feat last accomplished in 2001. Dover is a Long-Term Buy.

STOCKS WITH INSIDER BUYING
Below we list four A-rated stocks that have seen at least two insider buys since mid-September, with a sell/buy ratio of no greater than 12-to-1. We excluded option exercises and transactions that did not take place on the open market. Stocks recommended for purchase are presented in bold.
----- Insider Buying Since Mid-September -----
-- Total Return --
Company
(Price; Ticker)
Div.
Yield
(%)
Stock-
Market
Value
($Bil.)
Trans-
actions
Shares
Value
Sell/Buy
Ratio
Outstanding
Shares
(Mil)
6
Months
(%)
12
Months
(%)
Industry
Aflac
($46; AFL)
2.9
21.4
2
15,000
509,500
3-to-1
468
29
(13)
Insurance
Apache
($99; APA)
0.7
39.7
5
18,000
1,554,360
10-to-1
400
26
(23)
Consumable Fuels
Dover
($63; DOV)
2.0
11.9
2
8,350
4,560,004
4-to-1
187
35
(3)
Machinery
FDX
($91; FDX)
0.6
28.9
3
6,640
2,974,120
12-to-1
316
35
(3)
Air Freight

 


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