Due to the novel coronavirus pandemic, even the savviest investors are finding it tough to navigate the markets. A once-in-a-lifetime event, the virus has jolted markets like never before. Several stocks are still trading near all-time lows, and many companies have already filed for bankruptcy due to this crisis. With such a volatile environment, picking stocks may seem like Russain Roulette. However, there are still some tips and tricks that you can use to remain ahead of the market. One of those tricks is tracking insider buying stocks.
In this article, we will be looking specifically at the most significant insider buys in recent weeks. Insider buying occurs when the director, officer, or executive in a company buys its shares. This should not be confused with insider trading, which is the illegal act of trading stocks on information that is not public. Insider buying is entirely legal and can give you a lot of indicators regarding where the stock is going.
John Kepler, a professor of accounting at the Stanford Graduate School of Business, told InvestorPlace that it is crucial to recognize the different forms of insider trading.
I think it’s important to disentangle unusual purchasing from the legal definition of illegal insider trading based on material non-public information here. There are all sorts of reasons insiders might purchase their own shares (e.g., signaling to investors that they have confidence in the firm, etc.), just as there are all sorts of reasons insiders might sell their shares (e.g., liquidity, diversification, etc.). At a conceptual level, illegal insider trading should be a concern regardless of whether the trades are purchases or sales. While sales tend to get more scrutiny in the press (perhaps due to a typically clearer ‘smoking gun’), insider purchases of securities made while in possession of material non-public good news for the firm are still viewed as ‘stealing’ from shareholders from a securities regulation standpoint.
What one can gather from Kepler’s comments is that insider buys are a good indicator of management confidence. Executives may believe the markets do not correctly value the stock. Naturally, they want a piece of the action before it starts to heat up.
Here are three insider-buying stocks that are making waves:
We start with billionaire Carl Icahn and his purchase of 725,935 more Xerox shares. The modest buy increases his total stake to 12.82% from 12.48%, but Icahn is a long term believer in XRX stock. Last year, he was one of the main driving forces behind Xerox’s takeover bid for HP (NYSE:HPQ). Although that deal fell through, Icahn was very aggressive in his lobbying for Xerox.
I am a fan of XRX primarily because of the multiples at which it’s trading. The company manufactures print and digital document products. Management is also investing heavily in 3D printing technologies, so it has an eye towards the future. It has a reasonably healthy balance sheet, with debt maturities spread out from 2020 to 2039.
From a valuation perspective, shares are trading at a 70% discount to the industry. But there is certainly a lot to do for the company before it gets back to greener pastures. The second-quarter results are testimony to that, but still, there is nothing in the fundamentals that should deter you from this stock.
Invesco is an independent investment management firm headquartered in Atlanta, Georgia. It has branch offices in 20 countries. As of May 31, it had assets under management of $1,142.5 billion. No small fry by any stretch, but there is a need for caution.
Covid-19 has had a tremendous impact on Invesco’s fortunes. On March 23, Invesco Mortgage Capital, a branch handling Real Estate Investment Trusts, said it would be unable to cover margin calls due to the Covid-19-related sell-off. Until further notice, the company also halted dividends to preserve liquidity.
But that didn’t perturb President & CEO Martin Flanagan and director Sarah Beshar, from recently snapping up 294,507 shares and 9,500 shares, respectively. While IVZ is not in danger of going under anytime soon, I still feel its best to start a small position at this point. The insider trades indeed point to management confidence. But I would temper my enthusiasm. Good stock, yes, but in the long run.
H&R Block (HRB)
Albert Einstein once famously remarked, “The hardest thing in the world to understand is income tax.” Granted, I am sure you can think of a couple of more challenging things, but you can’t argue with a genius. The permanency of taxes brings us to the next entry on our list, H&R Block, a tax preparation expert.
The main thing going for the company is its business model. Since it prepares tax returns, the company is virtually recession-proof. It is also looking to the future with the acquisition of AI platform, Wave, which helps small business owners in managing their financials. That’s why I find it strange that HRB stock is trading at 4.58 times forward price to earnings, dirt cheap when you compare it to the sector, which is trading at 25.2 times. Why is that? How can a stock that has such great fundamental value be trading at such cheap multiples?
You can chalk that down to HRB flying under the radar despite a solid track record of returns. A good thing since the stock is so cheap that it’s practically a steal.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.