I follow and track a lot of different things in my rock-kicking expeditions as I search for cheap stocks with the potential for long-term returns. One of my favorite factors to track is insider buying-and-selling activity. The excess returns to corporate insider trading have been very well documented over the years, and I run fairly regular searches for insider acvitiy and have a service that sends an activity report daily to my inbox.
I have found that insider buying is more significant than insider selling over the years, and buying by the top two executive officers is particularly important. The CEO and CFO know more about their company than anyone else, including their positions and prospects. When they open their checkbook and buy shares in the open market, it is a statement that investors would be wise to consider.
When I ran my CEO and CFO insider screen this morning, I found there were just 20 companies where one of the big two had reached into their pockets and purchased more than $50,000 worth of stock in the company they control. There were just five where both of the top executives were buyers in the past month. I also noted there were not as many oil and gas companies on the list as you might expect, given the sector's recent weakness. Perhaps the executives of these companies are a little skeptical of an immediate and lasting oil reversal.
I also noted that insider buying in the business development companies continues to be strong. Apparently, these executives are not as concerned about the accounting issues and prospect of higher interest rates as many analysts and investors.
One of the largest buys in the past month was at PHI (PHII). CEO Anthony Gonsoulin spent $257,000 in late March to increase his stake in the company. PHI provides helicopter transportation services to the oil and gas business. It flies crews and equipment to offshore platforms in North America, West Africa, the Middle East and has a division that provides air medical transport. The stock is down with oil and gas weakness, but the company actually had higher revenues and operating profits in the fourth quarter. Two of its major oil and gas customers extended their contracts with the company in the quarter, giving some stability to future earnings as well.
PHI took advantage of favorable conditions in the bond market to refinance $300 million in 8.625% notes to $500 million in 5.25% notes with a longer maturity. Investors may be skeptical about the future of the company given weak conditions in oil and gas, but the guy running the show is more confident about the future.
Not too many investors are a big fan of retail operations right now, but both the CEO and CFO of New York & Company (NWY) have been buyers of their own stock in recent weeks. The company had a weak fourth quarter, with total and same-store sales slipping, but management expressed pleasure with improving traffic trends in both brick-and-mortar locations and their e-commerce platform as we came into 2015.
New York & Company has been closing unprofitable locations as well as expanding its outlet and online sales efforts, and the top two executives seem confident they can execute a turnaround and drive future sales and profits in the right direction. With the stock trading around five-year lows, it could double or more over the next few years if the company is successful.
I mentally associate Luby's (LUB) with the cafeteria locations that always made me feel like I walked back in time by 30 years on the very rare occasion that someone dragged me into one of their restaurants. However, in addition to what a good friend in Texas calls the "lunch lady stores," Luby's also owns 72 Fuddruckers restaurants and eight Cheeseburger in Paradise, and is the franchisor for 107 Fuddruckers in the U.S. and abroad. It expects to open 15 new company-owned locations and seven new franchise operations in 2015, so the company is growing and expects to continue to grow over the next few years. CEO James Pappas certainly thinks so, as he has spent more than $760,000 buying shares in the company he oversees.
Insider buying is a strong signal that better conditions, profits and higher stock prices could be ahead for a company. History has shown me that when the top two executives are buying, there is a significant possibility the stock will move substantially higher over the next few years.
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