[Editor’s Note: “5 Stocks to Buy With Heavy Insider Buying” is regularly updated to include the most relevant information available.]
Over the past several weeks, I have consistently pointed to record-high levels of insider buying as a bullish indicator that it’s time for you to start looking for stocks to buy.
Why? Two big reasons. Insiders are good at picking bottoms, and they are equally as good at picking winning stocks.
On the first point, just look at this chart from Bloomberg. Insiders are often early in calling stock market bottoms. But they are seldom wrong. Insiders bought big before the markets turned around in the early 2000s, and before markets bottomed in 2009.
On the second point, stocks with heavy insider buying tend to outperform. In an email to InvestorPlace, Andrei Simonov, the chairperson of the Department of Finance at Michigan State University, said, “Insider buying is always a positive signal. Numerous academic papers showed that it is indeed a good signal.”
One of those academic papers, authored by Nejat Seyhun, a University of Michigan finance professor, showed that stocks with significant insider buying tend to outperform by 5%.
With that in mind, let’s answer a very important question. What stocks which insiders bought big in May should you be buying right now?
Consider these five stocks to buy now, all of which had big insider buying in May:
- TransDigm (NYSE:TDG)
- Harley-Davidson (NYSE:HOG)
- CVS (NYSE:CVS)
- Virgin Galactic (NASDAQ:SPCE)
- Rent-A-Center (NASDAQ:RCII)
Stocks to Buy: TransDigm (TDG)
[Note: all insider data is sourced from Finviz.com]
As a designer, producer, and supplier of aircraft components, TransDigm has been hit hard amid the novel coronavirus pandemic.
Flying demand has screeched to a halt. Against the backdrop of zero demand, airlines aren’t ordering new commercial aircraft. TransDigm’s commercial aircraft business has been slammed. This pain won’t stop anytime soon. TransDigm management is calling for commercial aftermarket sales to drop by 70% to 80% for the rest of the year.
But this is a near-term hiccup in what is an otherwise strong growth narrative.
Over the next few years, coronavirus fears will fade and economic activity will normalize. Consumers will start flying again. Aircraft component demand will rise again. And TransDigm will get back to growing.
All of that is to say that today’s dirt-cheap valuation on TDG stock — 3 times sales versus a five-year-average sales multiple of over 5 — won’t stick around.
That’s why I’d follow the insiders on this one. Board Director and Managing Director at Berkshire Partners, Robert Small, has bought $125 million worth in May. Fellow Board Director and former CFO of Sherwin-Williams (NYSE:SHW) Sean Hennessy bought $700,00 worth of TDG stock in May.
In the long run, those big buys will yield big profits.
U.S. auto sales have fallen off a cliff as consumers under widespread stay-at-home orders have halted their discretionary spending. This plunge in U.S. auto market demand has caused significant pain for Harley-Davidson.
Global retail motorcycle sales at Harley-Davidson dropped more than 20% year-over-year in the first quarter of 2020. HOG stock has dropped nearly 50% year-to-date.
The CEO of Harley-Davidson thinks this pain is temporary. On May 8, he bought $2.1 million worth of HOG stock.
I think he’s right.
Over the next few months, the U.S. economy will gradually reopen. As it does, consumer behavior will start to normalize, and discretionary spending will rebound. U.S. auto sales demand will slowly recover. Harley-Davidson’s growth trends will improve. HOG stock will bounce back.
In other words, it appears the worst is over for Harley-Davidson. Going forward, things should only get better for both the company and the stock.
As a brick-and-mortar focused retailer, CVS has exposure to stay-at-home headwinds because consumers simply aren’t going out and spending as much money at physical locations as they used to.
For that reason, CVS stock has shed 16% this year.
But the company just reported strong first-quarter numbers which handily topped expectations and included healthy revenue and operating profit growth. Perhaps more importantly, management reiterated its full-year profit guide on the basis that Covid-19 isn’t creating huge financial disruption for the company.
Does that mean it’s time to buy the dip in CVS stock?
I think so. So do insiders. Alan Lotvin, the president of CVS Caremark, bought $315,000 worth of CVS stock in mid-May.
Over the next few months, economic activity will gradually normalize and CVS’ already resilient growth trajectory will only improve. As it does, CVS stock will rebound back to where it was at the beginning of the year, if not higher.
Virgin Galactic (SPCE)
Once one of the hottest and most hyped-up stocks in the market, commercial spaceflight company Virgin Galactic has seen the air come of out its wheels over the past few months.
Specifically, the coronavirus pandemic has presumably (yet again) delayed the launch of Virgin Galactic’s first commercial space flight, which was previously supposed to happen in 2020. Because a lot of the hype surrounding the company was based on its ability to finally commence commercial operations in 2020, this delay has weighed significantly on SPCE stock, which has fallen from $43 to $15 in matter of months.
Insiders are buying the dip.
Since May 11, four insiders — including the CEO and COO — have collectively bought $240,000 worth of SPCE stock.
In the long run, those buys will yield big rewards.
Virgin Galactic is a pioneer in the commercial space market, which is expected to grow from $350 billion today, to $1.1 trillion by 2040. Over that stretch, Virgin Galactic will turn into a really big company, powered by a niche but high-demand commercial spaceflight business and the development of hypersonic air travel technology (which could be used to replace planes at scale).
In other words, as the space economy booms over the next two decades, SPCE stock will roar higher. Against that long-term backdrop, today’s coronavirus-related weakness is nothing more than a buying opportunity.
Last, but not least, on this list of stocks to buy with heavy insider buying is Rent-A-Center.
As a rental equipment retailer, Rent-A-Center was initially seen on Wall Street as a big loser amid the coronavirus pandemic because of physical store closures. RCII stock dropped from $31 in late January, to $12 by March.
Then, Wall Street started to think that a discount-focused, rental-oriented equipment retailer like Rent-A-Center may actually win during Covid-19, because tight budgets will push consumers away from buying big-ticket items and towards renting them.
Rent-A-Center’s first quarter numbers confirmed that this is the case. The company reported positive revenue and comparable sales growth in the quarter, and commented that April sales trends have been quite strong, led by out-sized gains in the e-commerce business.
Over the next few months, the economy will gradually re-open (providing support for more consumer discretionary spend). But consumers will be cautious with their spend because of the huge job loss the economy has suffered (thereby providing support for more consumer discretionary spend on discount, rental items).
As such, Rent-A-Center’s growth trends should only get better as we head into the back-half of 2020. As they do, RCII stock will keep rallying.
Insiders apparently agree. In May, two Board Directors purchased nearly $800,000 worth of RCII stock.
I say follow those insiders, and stick with this rally for the foreseeable future.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.