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."
- KMI and KMR are businesses with a durable competitive advantage;
- The CEO, a genuine owner-operator, has an outstanding record of value creation, and his interests are well aligned with shareholders'.
- 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:
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)
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.