On Wednesday, I highlighted three stocks that company insiders have bought during the market correction. These companies are not exceptions; company insiders are snapping up shares at a rate unseen since the market's March 2009 bottom. Below, I highlight an additional four stocks that insiders bought in the past couple of days and give my take on each situation:
Chesapeake Energy (NYSE: CHK )
Buyers since Aug. 4: Four outside directors and the CEO.
Largest trade: Lou Simpson (director), 100,000 shares at $27.46 [Current: $31.23].
This purchase is eye-catching because of its size and, particularly, the person making the purchase. Lou Simpson is the former CEO of insurer GEICO (a subsidiary of Berkshire Hathaway). At GEICO, Simpson was responsible for investing the company's float; on his retirement, Warren Buffett said of him that he is "a cinch to be inducted into the investment hall of fame."
I haven't assessed the investment case for Chesapeake. However, I think that Lou Simpson's purchase is a strongly positive indicator. Simpson isn't infallible, but his purchase alone justifies looking at the stock more closely.
Morgan Stanley (NYSE: MS )
Buyers since Aug. 4: One outside director and three officers, including the CEO and CFO.
Largest trade: CEO James Gorman, 100,000 shares at $20.62 [Current: $17.17].
Investment banks are unsuitable as a long-term investment for two reasons, one of which is historical and the other recent. First, investment banks are not run for the benefit of shareholders; instead, the employees siphon off the excess profits for themselves. That was as it should be when the firms were partnerships, but it is intolerable once you invite outside shareholders in.
The second reason is that the stilts that raised brokers' profits to exceptional levels -- excessive leverage -- have been hobbled by new, stricter capital norms. On the basis of return on assets, investment banks aren't unusually profitable relative to other financial institutions. Without the excessive leverage, returns on equity will never return to the levels to which banks were accustomed. This applies specifically to Morgan Stanley and Goldman Sachs (NYSE: GS ) , as well as the investment banking businesses of Bank of America and Citigroup (NYSE: C ) .
With a long-term investment out of the question, one can still consider the brokers when valuations are significantly depressed for a Ben Graham-type deep value investment (but one had better identify a catalyst for the mispricing to close). Trading at just 0.58 times book value, three-quarters of tangible book value, and less than eight times forward earnings, Morgan Stanley qualifies as a candidate.
General Motors (NYSE: GM )
Buyers since Aug. 4: Three officers, including the vice chairman and the CEO.
Largest trade: CEO, 10,000 shares at $25.05 [Current: $25.62].
The insider purchases at GM are not large and, like investment banks, U.S. automakers are unsuitable as a long-term investment. Even with much lower debt, greater focus, new management, and so forth, I remain unconvinced that U.S. car companies boast superior economics.
However, like Morgan Stanley, General Motors may be a candidate for a deep value play, with a multiple of forward earnings below six.
First Bancorp (Nasdaq: FBNC ) [There are two publicly traded banks named First Bancorp. Make sure you're looking at the right one!]
Buyers since Aug. 4: Two directors.
Largest trade: 5,000 shares at $10 [Current: $9.24].
At $50,000, this is a small purchase, but keep in mind that the bank's market capitalization is less than $200 million. The transaction increased the buyer's ownership stake by nearly 80%.
Having briefly perused this community bank's most recent 10-K report, I think it's an intriguing situation for three reasons:
- Founded in 1934 in North Carolina, First Bancorp is well-embedded in the communities it serves through involvement with and sponsorship of local civic activities.
- Based on the discussion of their business in the report, I got the impression that the organization has a disciplined lending culture. It will not compete with large interstate banks that undercut them if the business does not meet their profitability targets, for example.
- First Bancorp is one of the winners of the credit crisis, having bought two banks that were closed by the FDIC. These acquisitions were significant in size and the loss-sharing agreements with the FDIC were made on very favorable terms.
This local lender trades at 0.56 times its book value, three-quarters of its tangible book value, and 12 times forward earnings.
Please note that this is not a recommendation: You should do genuine due diligence before buying any stock. In addition, micro-cap stocks are subject to a number of specific risks; their shares are less liquid than those of larger companies, for example.
In a correction, dividends anchor stock valuations. The Fool has identified 13 High-Yielding Stocks to Buy Today.
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