Insider Pedagogy: CVS, Dominion Resources, & Time Warner
- Posted by scheplick
- on February 24th, 2012
502 Bad Gateway
This is a post from Meena Krishnamsetty, editor and co-founder of Insider Monkey, a finance website that provides insider trading and hedge fund stock-holdings data. This is the first installment of a StockTwitsU series, Insider Pedagogy.
Inside information pays. Corporate insiders usually have access to material non-public information about their companies. They sometimes trade illegally on such information and make great profits. Some of them were investigated, caught and sent to jail, but there are still many other insiders trading in the grey area and they never get caught. In fact, insiders do not have to act directly on material non-public information to benefit from it. They can delay their purchases if they know negative news is about to be released. On the other hand, ordinary investors who do not have access to inside information will still buy the stock and lose money. As you might have guessed imitating insider purchases is potentially a very profitable strategy. Academic studies have also shown that insider purchases manage to beat the market on the average.
In this article, we are going to discuss the large-cap stocks that insiders are buying recently. All companies have at least $10 billion market cap and were purchased by at least one insider over the past two weeks.
CVS Caremark Corporation ($CVS): CVS was bought by one insider over the past 10 days. On February 13, Per G.H. Lofberg, EVP and President at CVS, purchased 46,400 shares of CVS at $42.99 per share. CVS was closed at $44.01 on February 21, up 2.4% from the price at which Lofberg purchased. During the same period, the S&P 500 index returned 0.82%. CVS is also a popular stock among hedge fund managers. At the end of the third quarter, there were 41 hedge funds with CVS positions in their 13F portfolios. Billionaire Warren Buffett’s Berkshire Hathaway had nearly $300 million invested in CVS at the end of last year. Jacob Gottlieb, David Einhorn, and Bill Miller’s Legg Mason were also bullish about CVS.
We are optimistic about CVS. We believe that the company is going to gain additional market shares and continue to be the industry leader. We also see robust revenue and earnings growth in CVS. For the 13 weeks ending December 31, 2011, the company reported total revenue of $28.3 billion, up from $24.6 billion for the same period in 2010. Net income also increased from $1.03 billion, or $0.74 per share, to $1.06 billion, or $0.84 per share. We think CVS will continue to have double-digit growth rates over the next few years. In fact, analysts estimated that CVS’ EPS will grow at 11.89% per year over the next five years. CVS’ forward P/E ratio is 11.96, so its P/E ratio for 2014 is 9.55. CVS’ main competitor Walgreen Co ($WAG) also has a low 2014 P/E ratio of 9.45.
Dominion Resources Inc ($D): D was also bought by one insider during the past 10 days. On February 14, Director Robert Jepson bought 10,000 shares of D at $50.289 per share. D was closed at $50.14 per share on February 21, nearly 15 cents lower than the price Jepson purchased at. Despite that, we are still bullish about D. Previously Jepson bought 10,000 shares of D on Valentine’s Day, and another director, Mark Kington, also purchased 25,000 shares at $49.82 on February 10. Additionally, Kington and three other insiders also bought 17,800 shares of D in total at around $49.5 per share at the end of January. There were also a few hedge funds bullish about D. At the end of the third quarter, there were 14 hedge funds reported owning D in their 13F portfolios. Jim Simons’ Renaissance Technologies had over $30 million invested in D at the end of last year.
We like Dominion’s focus on its core business and its expansion and growth plans. We also like the high dividends the company pays to its shareholders. Dominion has been increasing its dividend payouts for 9 consecutive years. Its current dividend yield is 4.18%, more than doubling that of 10-year Treasury bonds. D also has an attractive forward P/E ratio of 14.63 and its EPS is expected to grow at an average of 5% per year over the next five years. So its P/E ratio for 2014 is about 13. The main competitor of D is American Electric Power Co Inc ($AEP), which also has an attractive forward P/E ratio of 12.15. We recommend Dominion Resources as an alternative to 10-year Treasury bonds.
Another large-cap stock with recent insider purchases is Time Warner Inc ($TWX). Director William Barr bought 2624 shares at $37.9343 per share on February 17. This insider purchase is relatively small, so we do not think it deserves a closer look at this moment. But we will be tracking the stock closely and report any additional purchases by the same insiders or other insiders promptly.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
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