Insider buying tends to foretell handsome stock returns. So does a modest stock valuation. Combine the two clues into a search for stocks, and the results might be doubly rewarding.
Company insiders, including top executives, board members and key shareholders, are required to publicly report transactions in shares of firms with which they're affiliated. Studies have long shown that insider purchases tend to produce market-beating returns – especially those that involve "c-level" officers (chief this-or-that), those made by more than one insider and those at small companies with limited analyst coverage.
In 2007, Citibank's (C) quantitative strategies team in London devised a stock screen using these signals and other promising signs, including upside earnings surprises and modest price-to-earnings ratios. Back-testing of more than 9,000 insider transactions made at U.K. companies since 1994 showed that such a stock-picking strategy would have returned more than 23% a year.
Below are listed three companies with recent share purchases by c-level executives and shares that seem reasonably priced.
Monsanto (MON) sells crop seeds that have been bred or modified to resist bugs, disease and the company's own brand of weed killer, Roundup. Its shares trade at 20 times forecast earnings for the company's current fiscal year, but are perhaps less expensive than that number suggests. Earnings are in a slump, down 25% from two years ago, as margins in the company's herbicide business have been hurt by competition from overseas, especially China. Also, the company's new eight-trait corn seed called SmartStax has so far failed to impress with yield gains over cheaper two- and three-trait seeds already on the market. Management says yields were hurt by difficult growing conditions this year. Monsanto has a vast pipeline of seeds in development, including drought-resistant corn and Roundup-resistant soybeans; the latter is expected to prove a big seller in Brazil. Sales and earnings are expected to increase over the next two years, despite the company's challenges. Investors who tuck shares away today and await an earnings recovery collect a 2% yield. The company's chief executive and chief financial officer spent more than $1.5 million apiece on stock in July.
MEMC Electronics Materials (WFR) was created as a division of Monsanto, coincidentally, in 1959. The company makes silicon wafers for the semiconductor industry and sells mostly raw silicon to solar wafer makers, although it hopes to gradually make more of its own solar wafers. Last year MEMC paid $200 million for SunEdison, a builder of solar power farms. Analysts say earnings for the company are particularly difficult to forecast because of the lumpiness of solar revenues. A consensus of more than 20 analysts calls for earnings of 45 cents a share this year, up from a loss of 30 cents last year. Early forecasts for next year call for earnings to jump to $1 a share. That number, if it's attainable, would likely prove shares a good deal at their recent price of $12 and change. Seven officers bought shares in early August, together spending more than $1 million.
Charming Shoppes (CHRS) sells clothing for full-figured women through its Lane Bryant and Fashion Bug chains and for even fuller-figured women through its Catherine's stores. The company has operated at a loss for most of the past three years, and its shares briefly traded for pocket change last year, before rebounding to over $3 today. Last week, turnaround specialist James Fogarty, who had headed the company for the past 18 months, resigned to the surprise of Wall Street. Shares dropped more than 20% on the news. Fogarty spent more than $400,000 on stock in June. Other insiders made smaller purchases following news of his departure. Charming Shoppes in September reported that it had reduced its debt to less than its cash balance and achieved its first sales increase at longstanding stores in 15 quarters. The 1% sales increase at stores was overshadowed by a 36% jump in online sales. Current forecasts have the company returning to a slim profit next year.
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