3 Stocks That Insiders Are Buying Now

The recent stock market volatility has created opportunities to buy superior businesses at bargain-basement prices. Given limited time and resources, how does one identify the most compelling names that? Insider stock purchases can provide an excellent compass, since they reflect the judgment of the people who understand the business best.

Here are three stock ideas that insiders have been buying during the past seven days, plus a bonus candidate:

Kinder Morgan (NYSE: KMI  ) and Kinder Morgan Management (NYSE: KMR  )
Rich Kinder is arguably the greatest capital allocator in the oil & gas business. He is the CEO of three publicly traded companies, two of which I want to talk about today. Kinder Morgan and Kinder Morgan Management own and operate pipelines and terminals that serve transport oil, gas, and other energy products. Their pipeline assets in particular would be very difficult to replicate, creating a wide moat around the businesses.

Last Wednesday, Mr. Kinder bought 25,000 shares of Kinder Morgan Management, or KMR, at an average price of $60.22, and 50,000 shares of Kinder Morgan, or KMI, at an average of $27.67. Yesterday, both stocks closed at a small discount to the prices Kinder obtained.

By the way, don't be tempted into thinking that the existence of multiple companies indicates that management is trying to conceal something. Kinder was named Morningstar's CEO of the year in 2005, citing "the tremendous amount of value he has created for shareholders" and his "exemplary stewardship."

Let's summarize:

  1. KMI and KMR are businesses with a durable competitive advantage;
  2. The CEO, a genuine owner-operator, has an outstanding record of value creation, and his interests are well aligned with shareholders'.
  3. This savvy businessman believes the shares are attractive at current levels.

I don't know what you look for in an investment, but it's very rare that I come across that combination of attributes, which should immediately qualify these stocks for closer inspection.

General Growth Properties (NYSE: GGP  )
A post-bankruptcy issue, the shares of General Growth Properties fall in the category of special situation. GGP is a real estate investment trust, and the second-largest mall operator in the U.S.

Malls? In this economy? Before you dismiss this idea entirely, bear in mind two things. First, if it is sufficiently widespread, a skeptical reaction like that creates opportunity. Second, it's impossible to gauge the merits of an investment without knowing how its market price relates to intrinsic value -- regardless of the quality of the business. And that's exactly where insider buying comes in, by helping investors to establish benchmarks for value.

Last Friday, GGP's CEO bought 60,615 shares at $14.13, and the COO went in for 20,000 shares at $14.25. Yesterday's closing price of $13.59 represents a small discount to those prices.

Wells Fargo (NYSE: WFC  )
I'm sneaking Wells Fargo in here because I think it's worth flagging, even though the most recent insider purchase of any significance dates back to April 21, when the bank's CFO bought 10,000 shares at $28.54 per share. With the stock closing at a 13% discount to that price yesterday, the purchase is certainly a favorable indicator. One would hope that the CFO would have some idea of his company's value.

Another insider buy that I discussed nearly two years ago provides an interesting point of comparison. In June 2008, then-Chairman Richard Kovacevich bought approximately $1 million worth of Wells Fargo stock at $26.05 per share, a 5% premium to yesterday's closing price. You might object that this purchase is irrelevant, because it took place before the full extent of the sector's exposure to bad loans was understood. True, but not every change since June 2008 has hurt bank's intrinsic value. For one, Wells Fargo was able to make a distressed purchased of Wachovia, which has raised it to a new level of scale. Consider the numbers in the following table:

Metric

Current (Aug. 9)*

Kovacevich purchase (June 6, 2008)*

Price-to-book value multiple 1.03 1.78
Price-to-earnings multiple (TTM)** 9.7 10.1

Source: Capital IQ, a division of Standard & Poor's.
*Aug. 2011 multiples based on the closing price on Aug. 9. Jun. 2008 multiples based on Kovacevic's purchase price ($26.05)
**Normalized EPS.

Today, you can buy shares at roughly the book value of shareholders' equity, which is exceedingly rare for Wells Fargo. Perhaps you believe that value will need to be written down due to further losses. That's possible, I suppose, but don't lump this lender in with Bank of America (NYSE: BAC  ) , for example: Wells Fargo is more focused and better-managed than any of its direct peers -- including JPMorgan Chase (NYSE: JPM  ) . Assuming the book value figure is sound, paying book implies that you are getting management's ability to generate an economic return on shareholders' equity for free – a very sweet deal.

I hope you enjoyed learning about these three stocks. For a look at a bonus company, click here to view the Motley Fool's free report: The Hottest IPO of 2011.

Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. You can follow him on Twitter. The Motley Fool owns shares of JPMorgan Chase. The Fool owns shares of and has opened a short position on Bank of America. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (38)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 10, 2011, at 6:04 PM, ContraryDude wrote:

    I agree that insider buying is a great clue to help determine when to add to long-term positions. In my IRA I own shares of 2 stocks that have seen lots of insider buying lately, Gladstone Investment Corp (GAIN), which pays a monthly dividend currently yielding about 9%, and Pennant Park Investment Corp (PNNT), yielding 12%. I just added some shares of PNNT.

  • Report this Comment On August 10, 2011, at 6:24 PM, TMFTomGardner wrote:

    I highly recommend the book "Investment Intelligence from Insider Trading" by Dr.

    H. Nejat Seyhun.

    In it, he very convincingly shows that the only correlation between insider buying and strong equity performance is when insiders buy *after* the stock has *risen* 20% or more over the preceding 6-12 months.

    Similarly, the only correlation between insider selling and terrible equity performance is when insiders sell *after* the stock has *fallen* 20% or more over the preceding 6-12 months.

    For this reason, I would love to see where there is relatively stiff insider *selling* right now...as a way to drum up candidates for shorting. :)

    Nonetheless, I will research these companies, Alex, and thanks. Just because there isn't a broad correlation, doesn't mean individual stocks aren't excellent candidates for buy.

    Highly recommend the book. Fool on!

  • Report this Comment On August 10, 2011, at 8:52 PM, TMFAleph1 wrote:

    I'd like to add that these three stocks are not the exception. From a WSJ article published today:

    "Research firm InsiderScore reported Tuesday a "dramatic acceleration in insider buying" over the past few days. It noted the volume of insider buys hasn't been so high since the market's March 2009 bottom."

    Alex Dumortier

  • Report this Comment On August 11, 2011, at 3:09 AM, adcmelb wrote:

    Wells Fargo isnt the only bank that senior management is buying up big Lloyds Banking Group both the CEO and Chairman purchased 200,000 shares if that isnt confidence then I dont know what is

  • Report this Comment On August 11, 2011, at 8:23 AM, jargonific wrote:

    Corporations are using their cash reserves to buy stocks to show confidence in their companies. This was discussed yesterday in the news. It holds true for some CEOs who have their income in their companies despite sharp downturns. So it may not be any indicator at all that a Wells Fargo purchase is made right now other than the quest to spark green lines on a red lining board.

  • Report this Comment On August 11, 2011, at 8:41 AM, dbtheonly wrote:

    But given the confusion about the Mortgage Backed Securities, potential violations of state laws regarding the filing of mortgage papers, and the less than clear housing market; it is impossible to calculate the "book value" of a major bank as one has absolutely no idea what they own, mortgage or property-wise and no idea of the value thereof.

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