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5 stocks smart insiders are buying
There's been lots of selling this month, but a few CEOs are going against the grain and snapping up their companies' shares. Here's why you should do the same.
By Jim Jubak
It increasingly looks like investors have decided that Santa came early in 2005. Instead of holding on for the stock market's traditional Santa Claus rally in the waning days of the year, investors have been selling steadily since early December. The Nasdaq Composite ($COMPX), which hit its high for 2005 on Dec. 2, is down 2% since then as of Dec. 20. The Dow Jones Industrial Average ($INDU), which looked like it might finally move above March's high at 10,940, is down 1% from its December high of 10,913.
That's why it could be highly profitable right now to note which stocks are bucking the trend and focus on a handful of stocks knowledgeable insiders aren't selling. In fact, they're buying. The folks -- directors and officers -- who know these companies best are voting to buy with their own money at a time when selling is in vogue across the stock market. Now that's a vote of confidence to pay attention to, if you're looking for stocks to stuff into your portfolio as we head into 2006.
It's not especially hard to figure out why investors in general are selling. Anyone who has profits -- especially the big institutional and hedge-fund managers who get graded by clients every quarter and, most importantly, at year end -- is selling to lock in those profits. If you're ahead of the index, there's no point in risking that record with just a few days to go in the year.
What are the insiders doing?
The only folks who have been selling faster than institutions with profits to book have been company insiders. Look at some of these insider sales records in recent weeks. At Corning (GLW, news, msgs), where shares are up 71% in 2005, 19 insiders including the chairman, the CEO, CFO and COO sold 861,303 shares in just one week. Prices ranged from a low of $19.59 to a high of $20.98. The stock peaked at $21.39 on Dec. 12 and is down 6% from that high as of Dec. 19.
And Corning isn't by any means unusual. Valero Energy (VLO, news, msgs), a stock up 131% in 2005, saw heavy selling by its CEO in late October. Insiders at Advanced Micro Devices (AMD, news, msgs), a stock up 28% in 2005, have been selling steadily in November and early December. Same at Yahoo! (YHOO, news, msgs), a stock up only 9% in 2005, but up 28% from its low on Sept. 21, 2005.
More from MSN Money
When everybody's selling, I don't think insider sales tell you a whole lot about the prospects of individual companies. How can you say that the selling at Yahoo! means anything about Yahoo!, for example, when selling is everywhere?
Which is what makes insider buying at a time like this so meaningful. Contrarian buying requires conviction and solid information about future trends. It's certainly gets my attention as I try to plot a course for what is likely to be a perplexing 2006.
Stocks that got my attention
In my regular Wednesday morning appearance on CNBC's "Morning Call," I flagged these three stocks with strong insider buying in recent weeks:
Chiquita Brands (CQB, news, msgs). In November, two directors purchased 8,300 shares of Chiquita Brands. That's not a lot of shares, but with no insider selling, I thought that was an important vote of confidence in the company's new strategy. (You can see a list of the most recent insider buys and sells on our Web site in the stock research section.) And then another shoe dropped, loudly, on Dec. 19: Chiquita Brands CEO Fernando Aguirre bought 15,000 shares of stock. Chiquita Brands faces uncertainty in the banana market in the second half of 2006 thanks to recent hikes in tariffs set by the European Union. But bananas are becoming a smaller part of the company's business as its purchase of Fresh Express, a provider of bagged prepared salads and cut fruit, kicks in. In 2006, the Fresh Express operation should account for more than 40% of the company's earnings before interest, taxes, depreciation and amortization, according to BB&T Capital Markets. The growth in that part of Chiquita Brands' business will reduce the volatility of the company's earnings, which will, gradually, lead investors to pay a higher multiple for more dependable results. Our StockScouter rates the shares a 5 out of a possible 10.
WebMD Health. Because the big issue for investors with WebMD is valuation -- that is, how much to pay for the company's projected 23% annual growth over the next five years -- the heavy buying by company insiders is a huge plus. Since the beginning of October, the company's chairman, chief technology officer and director Stanley Trotman have bought 275,508 shares at prices from $22.86 to $24.52 in 18 separate transactions. With what many Wall Street analysts regard as a best-in-class online platform for the delivery of health information, WebMD Health (WBMD, news, msgs) has a good shot at exceeding that growth target as more and more medical and drug advertising, like advertising in general, shifts to the Internet. Total health-related advertising hit $13 billion in 2004, and while online advertising accounts for only a very small part of that total, healthcare ads accounted for 6% of total online spending in 2004, an increase of two percentage points in a year. In addition to the company's advertising-supported public portals, the company also provides customized private portals for employers and health care plans. Private portals are projected to account for 20% of revenue in 2005. The company was spun off from parent Emdeon (HLTH, news, msgs) in a Sept. 29 initial public offering (IPO). Emdeon owns 100% of the company's Class B shares, which gives the former parent voting control of WebMD. Our StockScouter does not rate these shares.
Western Alliance Bancorporation (WAL, news, msgs). Frequently, insiders sell their shares as fast as they can after their company goes public. But at Western Alliance Bancorporation, insiders have been buying since the company's June 2005 IPO. The fear that rising interest rates will cut loan demand and lead to a rise in bad loans made 2005 an iffy year for many bank stocks. But at Western Alliance, insiders have bought shares 19 times since July. That includes chairman, president and CEO Robert Sarver, who made his name in San Diego buying and selling distressed office properties in the 1990s. Those same rising rates made 2005 a tough year for financial companies that specialize in commercial real estate and construction lending. But insiders have bought 147,000 shares, according to data on CNBC.com on MSN Money. That's probably because Western Alliance isn't operating in just any real estate market: headquartered in Las Vegas, the bank's lending has a heavy exposure to the fast-growing Las Vegas and Henderson, Nevada markets. Our StockScouter does not rate these shares.
And as always, I have two more "exclusive" picks for readers of CNBC.com on MSN Money.
Chesapeake Energy (CHK, news, msgs). This stock is the current poster child for insider buying. Big buys by CEO Aubrey McClendon and president Tom Ward, who co-founded Chesapeake Energy in 1989, have been the talk of the oil patch and of energy investors since June, when McClendon began the current buying binge. With oil and natural gas prices at historic highs, the CEO and president are making a big bet that Chesapeake can keep growing revenue and earnings at better than the 14% annual rate Wall Street analysts project for the company over the next five years. How big is this bet? McClendon bought 100,000 shares in June, 750,000 in August, and 305,000 in September. On Dec. 14 McClendon bought 750,000 more shares (that's $24 million worth) and company president Ward joined in to buy another 750,000. Our StockScouter rates these shares a 10 out of a possible 10.
Stryker (SYK, news, msgs). Sometimes a shift from insider selling to insider buying just jumps out of the data. That's the case at Stryker. Through August, all company insiders did was sell, sell, sell, with the Stryker family leading the way. Then on Oct. 27, director William Parfet bought 100,000 shares at $40.05. Four more insider buys followed by Nov. 1 with the name of John Brown, legendary former Stryker CEO (well, what would you call a guy that delivered 20% growth year after year after year?), prominent in the group with a purchase of 25,000 shares on Oct. 31. This year hasn't been a great year for orthopedic companies with worries about price declines crushing the stocks of Stryker and its competitors. Stryker, which hit a high of $56.10 on Sept. 7, 2005, tumbled to $39.80 on Oct. 27. Which, not so coincidentally is when insiders started buying. Need a clearer signal that insiders thought the stock had become too cheap to pass up? (The company had also started to tell Wall Street that it though prices in its market had stabilized with the trend for the rest of 2005 and into 2006 looking steady or showing a slight 1% drop.) Our StockScouter rates these shares a 9 out of a possible 10.
This is my last Jubak's Journal column before the Christmas holiday. All my best wishes to you and yours for the holiday season and for 2006. My next Jubak's Journal column will run on Dec. 27.
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Chesapeake Energy. He doesn't own short positions in any stock mentioned in this column.
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