Management Eating Their Own Cooking

 | Nov 16, 2011 | 1:00 PM EST
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When I visit my favorite restaurants and see the chef and staff eating there, I take great comfort in the fact that they are eating what they cook.

There's no greater affirmation of quality than when someone on the inside of a business is eating his or her own cooking. Whether it's literally at a restaurant or figuratively at another business, it sends a clear signal when they put their own money back into what it they are selling.

Over the past couple of weeks, a couple of businesses that I have been looking at offered a little help by the way of significant insider purchases. Al Lord, CEO of SLM  (SLM), recently purchased 100,000 shares at about $13.70 a share. This purchase was significant in that it boosted Lord's equity holding by 25% to more than 500,000 shares. SLM, commonly known to most as Sallie Mae, provides credit to finance educational loans as well as other student-loan-related services. In addition to the CEO's purchases, the company is retiring back stock.

SLM shares trade for $13.85 today, valuing the business at less than 8x 2011 earnings. Profit growth should remain decent in the upcoming years. While recent legislation eliminated SLM's ability to originate federal student loans, the company is aggressively expanding its private loan business. In the third quarter ended Sept. 30, loan originations grew by 29% while delinquencies and charges declined significantly. On top of buybacks, the company continues to return cash to shareholders with a 3% dividend yield.

Specialty-glass manufacturer Corning (GLW) was the subject of a bullish writeup in Barron's last week. Sales declines in TVs and PCs have hurt shares, as Corning is a major supplier of the screens that go into making many electronics. More than 85% of Corning's profits come from glass used in TVs, computers, smartphones and tablet computers. These short-term concerns have sent shares lower, now trading at $15.50 or a P/E of 7. At that price, shares barely trade above book value for a company that has generated an average return on equity in excess of 15% for the past seven years.

Cash of $6.3 billion dwarfs total debt of $2.2 billion. No surprise, then, that earlier in the month company director John A. Canning doubled his equity ownership when he bought 30,000 shares for $15.40 a share. Back in August, Corning's CFO spent $1 million buying shares for $13.80 each. For investors looking for a boring, cheap but highly resilient business, Corning's valuation is tough to beat at these levels. A 2% dividend doesn't hurt either.

Director Barry Diller continues to buy up shares of Coca-Cola (KO) with his most recent purchase of 100,000 shares, bringing his total stake to 1.7 million shares. Because everyone knows Coke, its valuable brand and the stability of the business, it's rare that you will be able to buy shares at any meaningful discount to intrinsic value. Coke shares are almost like an annuity today. Shares yield 2.8% at the current price and trade for a very acceptable 12x earnings. The dividend has increased every year since 1995.

The emerging markets are still a huge growth platform for Coke. With future dividend increases all but assured, those interested in a long-term holding will benefit from those dividends. Had you bought Coke back in 2008 when shares hit $40, your dividend yield today would near 5%. Diligent investors can surely find more attractive investment opportunities, but Coke is not just a stock for grandpa either.

One should never dismiss looking closer at a company where insiders are buying into the stock, especially when the stock price is suffering and trading at low multiples. To be sure, insiders are mortal too and can make bad purchases. But it is always worth examining insider buys, especially in companies suffering from temporary problems.

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