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All Contents © 2020The Kiplinger Washington Editors
By Michael Brush, Contributing Writer
| April 2, 2020
As the media and investors whipped up a frenzy of COVID-19 panic selling in March, some corporate insiders (such as CEOs and directors) had an entirely different take. They calmly scooped up shares of their own companies at an insider buying rate we haven't seen in a decade.
Here's some useful market insight: When investors and the media are super-negative and insiders are buying in droves, that's often a great time to purchase stocks for the medium-term, which is at least two or three years.
Here's another bullish signal from insider trading: Many insiders are buying companies in the "wrong" places. They're decidedly going for stocks in energy, basic materials (such as chemicals) and consumer-facing businesses. These are all among the hardest-hit areas of the market, with more to lose in a prolonged recession.
This all adds up to the boldest "contrarian" insider trading buy signal that I've ever seen in the 10 years I've tracked insider activity as a starting point for investment ideas in my stock letter Brush Up on Stocks.
Here are seven blue-chip stocks that have experienced significant insider buying lately. Insider buying, like any other signal, isn't a guarantee of anything. So to improve our chances of success, we narrowed down a list of companies seeing heavy insider buying to make sure we're buying high-quality names. Thus, this list is made up of blue-chip companies with market values of at least $20 billion that boast enduring, powerful brands and/or some other barriers to entry.
Data is as of April 1. Purchase amounts range from $250,000 to millions of dollars. But if you decide to follow insider trading after this, don’t be put off by smaller numbers. For my stock letter, any purchases above $100,000 can be a meaningful signal, especially when combined with other bullish patterns such as “cluster” buys or line officer buying, which we also see in several of the stocks on this list.
Market value: $27.3 billion
Insider buying: $26.2 million by CEO and founder Michael Dell
Purchase price range: $26.00-$37.00
Dude, you're gettin' a … cloud?
If you still think of Dell Technologies (DELL, $36.90) as just a personal computer company, it's time to upgrade the operating system above your neck. Thanks to the purchase of EMC and a controlling stake in VMware (VMW) a few years back, Dell is now a highly competitive player in cloud services.
"The cloud" commonly refers to arrays of servers, storage and software that companies use to better manage everything from online sales and employees to analysis of "big data" for strategic insights.
That EMC-VMware purchase has provided Dell with some unique strengths among cloud companies.
First, it's the leader in a cloud niche called "hyper-converged infrastructure." This is the use of virtualized servers and networking to help companies manage more data "on the edge." That means at local sites instead of in a more cumbersome centralized data center. Dell also has strengths in all-flash storage arrays, which offer benefits such as greater storage density and lower power usage.
Dell does still sell desktops and notebooks. It's a cutthroat business thanks to competition from the likes of HP (HPQ) and Lenovo (LNVGY). The good news is, Dell has been gaining PC market share for years.
Another plus for investors: Dell is founder-run, by Michael Dell, who has conducted some serious insider buying of late. This can help investors, as several studies have shown that founder-run companies outperform their peers.
Market value: $33.3 billion
Insider buying: $988,238 by an officer and a director
Purchase price: $26.00
Keurig Dr Pepper (KDP, $23.66) might be small compared to mega-caps Coca-Cola (KO) and PepsiCo (PEP), but it's still a mighty little brand powerhouse.
It boasts the second biggest non-cola and lemon-lime brands – Dr Pepper and 7UP – plus other enduringly popular drinks including Canada Dry, Hawaiian Punch, Mott's, Sunkist and A&W.
Spawned from the merger of Dr Pepper Snapple and Keurig Green Mountain, this company also dominates the single-serve coffee brew market in North America. About 22% of households have its Keurig coffee makers. Consumers like the convenience of K-cups – even if they're darned expensive compared to regular coffee. One reason: Keurig offers a broad assortment of flavors and products thanks to partnerships with other companies such as Starbucks (SBUX).
In soft drinks, Keurig continues to roll out tweaked versions of popular brands and take price increases. Investors also benefit from merger-related cost savings. Management projects $600 million in cost cutting by 2021, or around 5% of sales. In 2019, the company reported 11% operating income growth on 3.2% underlying net sales growth. It also posted $2.4 billion in free cash flow. Keurig is using a lot of the money to pay down debt.
One issue here is that Keurig is majority-owned by the German conglomerate JAB Holdings, which also controls popular consumer food brands like Peet's Coffee, Krispy Kreme, Panera and Pret a Manger.) That majority stake is a turnoff for investors who favor shareholder democracy. But it does free up managers to prioritize long-term growth over quarterly results. As Warren Buffett often points out, this can be a big plus for shareholders.
Market value: $29.6 billion
Insider buying: $560,200 by a director
Purchase price: $112.04
Sheltering in place has helped shares of Amazon.com (AMZN) hold up in the bear market. Investors think all that time at home and the shuttering of so many brick-and-mortar stores will boost sales at the king of online retail.
You'd think the benefit would spill over to shippers like FedEx (FDX, $113.48), too. But FDX stock is down sharply during the March mayhem. What gives?
Behind the scenes, FedEx handles lots of business-to-business shipping all around the world. That's down sharply as the global economy cools because of COVID-19. It's gotten so bad, FDX has joined a growing swath of companies that have suspended guidance for 2020. Investors hate that kind of uncertainty, so they are selling.
FedEx has another issue: Going into this economic train wreck, the shipper was already dealing with the loss of Amazon.com as a customer. Amazon itself is moving into the shipping business itself, another challenge.
So why has a FedEx insider been buying stock?
COVID-19 won't hold the economy back forever. This is essentially a one-off problem (albeit a severe one). After the virus fears subside, FedEx should stand as a long-term play on the growth of e-commerce – and economic growth in general. Meanwhile, it holds a nice trump card. Upstarts would have to spend a bundle to replicate FedEx's vast infrastructure of trucks, planes, warehouses and 475,000 employees. This keeps competition at bay.
Market value: $229.8 billion
Insider buying: $265,000 by a director
Purchase price: $265.00
Shares of Mastercard (MA, $228.61) nosedived as soon as the spread of COVID-19 amped up worries about global growth. After all, as the second largest payment processor in the world, Mastercard depends on transaction volume for revenue.
But what if worries about COVID-19 and its impact on global growth are vastly overstated, which is my thesis? After all, there are many signs it's not much more lethal than normal seasonal influenza, and President Donald Trump is itching to get the country back to work.
If the economy snaps back fairly quickly, as Trump likes to project, then the pullback in Mastercard's stock is a buying opportunity. One director thinks so, given his purchase of over a quarter-million dollars' worth of stock.
"We view the impact of the coronavirus as a transitory event and fully expect consumer spending globally to come back once this event has passed," Mastercard CFO Sachin Mehra told investors in a March 10 conference call.
Of course, no one really knows exactly when that will happen. But once it does, Mastercard will still be there – with the same rich profit margins extracted from its asset-light business. (Remember: MA is simply a payment processor; it's not responsible for any of the debt.)
Mastercard also enjoys barriers to entry because it would be tough to set up a similar payments system, Morningstar analyst Brett Horn says.
Market value: $158.8 billion
Insider buying: $2.7 million by a director and three officers
Purchase price range: $34.00-$48.00
Over the years, Exxon Mobil (XOM, $37.53) had been criticized for investing too judiciously in energy exploration and production, but that had been a way to maintain financial strength and return cash to shareholders.
Relatively recently, Exxon flipped the script, aggressively ramping up capital expenditures in 2018 and 2019, with similar plans for this year. Now, however, with West Texas Intermediate trading down into the low $20 range, Exxon faces the high likelihood of reining its capex in again.
Russia and Saudi Arabia recently began fighting it out, triggering a price war, just as questions arose about energy demand in a coronavirus global slowdown. Shares have lost more than 45% of their value in 2020. But amid that weakness, four insiders scooped up a huge number of shares worth $2.7 million. Large "cluster" insider buying like this can be a very bullish signal in insider analysis. Obviously, they think the selling is overdone. If the economy bounces back fairly quickly, those insiders will turn out to be right.
Here's another potential positive for Exxon Mobil and the entire energy complex. Both Russia and Saudi Arabia are so dependent on oil revenue, they can't afford to let oil prices stay so low for long. "They are playing a very expensive game of chicken," says Mark Zandi, the chief economist of Moody's Analytics. They are likely to settle, he believes, and agree to production cuts, which would support oil prices. Indeed, Trump recently tweeted optimism of a price cut, sending energy prices spiking.
As for Exxon Mobil, the question on many investors' minds is whether the Dividend Aristocrat will be able to maintain its payout. Indeed, many energy firms have announced dividend cuts and suspensions of late. However, Morgan Stanley analyst Devin McDermott believes Exxon should be able to cover its dividend with operational cash flows this year. However, XOM might have to take on debt for any capital spending, which McDermott thinks the company will cut.
Market value: $108.4 billion
Insider buying: $508,732 by an officer and a director
Purchase price: $87.87
AbbVie (ABBV, $73.42) is like an investor who puts too much money into one stock. It gets almost 60% of its revenue from the blockbuster drug Humira, used to treat autoimmune diseases such as rheumatoid arthritis and Crohn's disease.
That's all well and good when competition from other drugs is scarce. Increasingly, though, that's not the case. Competitors with biosimilars and other effective therapies for the same illnesses are cropping up.
This has some investors worried about AbbVie's stock. But they are overlooking a few key positives. ABBV has been buying other successful drug companies, such as Pharmacyclics, which brought in the cancer drug blockbuster Imbruvica, and Allergan (AGN), which has key therapies in eye care, neuroscience, gastroenterology and women's health. (The Allergan deal is still pending but is likely to close in the second quarter.)
Next, AbbVie has a rich pipeline of dozens of drugs in development for cancer, autoimmune diseases and neurological disorders such as Parkinson's disease, Alzheimer's disease and multiple sclerosis. AbbVie also has an A-team sales force to manage these drug launches.
ABBV shares have held up decently, off 17% to the S&P 500's 24% decline so far. But an AbbVie officer and a director have seen fit to conduct some insider buying, snapping up more than a half-million dollars' worth of shares.
Market value: $20.1 billion
Insider buying: $1.8 million by CEO James Fitterling and two directors
Purchase price range: $25.00-$38.00
Dow Inc. (DOW, $27.04) sells a bewilderingly huge range of chemicals, foams, sealants and solvents used in everything from cars and cosmetics, to food packaging, footwear, housewares, sporting goods, toys and aircraft de-icing. They're also used in a broad array of industrial applications.
In short, if you wanted to find a company that was finely attuned to all aspects of economic growth, this would be it. Dow has a hand in just about every end market imaginable. Of course, when the outlook for the economy darkens, investors sell Dow. You can't blame them. It's the definition of an economically sensitive business.
But what if investors are wrong about the lasting negative impact of coronavirus on the economy? What if it turns out to have a fairly short-lived impact on growth, especially with so much fiscal and monetary stimulus being dumped on the economy?
That might be the driver behind insider buying from Dow CEO James Fitterling and three Dow directors. Since they have a better view of end market demand trends on their sales than we do, perhaps it makes sense to go along with their judgment and follow them into shares.
Only time will tell who was right. But insiders have made a sizeable bet here, showing a lot of conviction. Behind the scenes, Dow has been cutting costs aggressively, and it produces a lot of free cash flow.
Michael Brush had no positions in any stocks mentioned in this column as of this writing. Brush has suggested DELL, KDP, FDX, MA, XOM, ABBV and DOW in his stock newsletter Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School.