How much would you pay for some inside information?
No, this isn’t an exercise in entrapment. The insider knowledge I’m referring to is legal. Corporate officers, directors and major shareholders must report their trades in their company’s stock to the Securities and Exchange Commission within two business days.
The figures are available to anyone who wants to study them. Many people don’t bother, and as a money manager, I try to take advantage of the prevailing neglect. This legal insider trading data is one of the signals I use to decide whether to buy a stock.
Dell Inc. (DELL), once a market darling, is largely ignored by investors now. Dell stock, which traded for more than $58 when technology stocks peaked in March 2000, fetches about $15 today.
Against this gloomy backdrop, Michael Dell, chairman and chief executive officer, purchased more than 10 million shares in March. This brought his total holding in the company he founded to about 273 million shares. He owns 14 percent of the Round Rock, Texas-based company, a stake worth about $4.1 billion.
Dell doesn’t actively trade shares in his own company, trying to time the stock’s gyrations. He is more of a patient accumulator.
Under Investors’ Radar
I think his latest judgment is sound. While the stock languishes, the company has reported two consecutive quarters with the highest quarterly earnings per share in its history. Investors seem not to have noticed.
For the fiscal year that ended in January, Dell reported a 39 percent return on stockholders’ equity. Apple Inc.’s comparable figure is 35 percent. Yet Dell sells for only 11 times earnings, a moderate multiple.
At AOL Inc. (AOL), the large but struggling Internet portal site that was spun off from Time Warner Inc., insiders also bought shares last quarter. The biggest transaction was the purchase of 477,000 shares by Timothy Armstrong, chairman and chief executive.
New York-based AOL’s revenue fell in five of the past seven quarters. As they become more Internet-savvy, many people no longer feel a need for a portal. Search engines are easy to use. For those who want a portal, AOL faces competition from Yahoo Inc. and Microsoft Corp.’s MSN service.
Vote of Confidence
Armstrong’s purchase, amounting to about $10 million, suggests that he thinks these problems can be solved.
AOL stock looks cheap by some measures: 0.9 times book value (corporate net worth per share) and 0.9 times revenue. It is not cheap on earnings, however, with a price/earnings ratio of 26. The balance sheet looks strong, with debt less than 4 percent of equity.
The company suffered a loss of $7.34 a share in 2010. This year, analysts expect it to bounce back and show a profit of about $1 a share.
Transactions by top executives such as Dell and Armstrong are my favorite form of insider intelligence. I believe that trades by chief executive officers and chief financial officers are the ones that best predict future stock movements.
Several other types of insiders must also file reports with the SEC. Corporate officers, directors, and owners of 5 percent or more of a corporation’s stock all must disclose their trades.
I view trades by these other insiders are predictive, but not to the same degree as C-level executives.
In some cases, a company itself qualifies as an insider. That happened this month with Verizon Communications Inc. (VZ), which was buying back a chunk of its own stock.
Verizon, based in New York, is the second-largest U.S. telecommunications company by market value, after AT&T Inc. On April 7, the company bought more than 17 million of its shares.
The buyback, executed when the U.S. stock market was down slightly as aftershocks rocked Tokyo, is part of a larger plan. In February, Verizon’s board authorized the company to buy back as many as 100 million shares, about 3.6 percent of all outstanding shares, by early 2014.
Such buybacks are usually a good sign for shareholders. They signal that a company’s board thinks its stock is undervalued, and that management thinks the present moment is an opportune time to buy.
To me, the best thing about Verizon shares is the dividend yield, currently more than 5 percent. Shares fetch 14 times earnings, which is not too pricey.
Real Estate Play
On the negative side, the company’s debt exceeds shareholders’ equity.
General Growth Properties Inc. (GGP), a Chicago-based real estate investment trust that owns shopping centers, emerged five months ago from the largest real-estate bankruptcy in U.S. history. Before going through bankruptcy, it owed $27 billion.
General Growth Properties’ malls are home to about 24,000 stores. The REIT is struggling to regain profitability. In 2010, it lost $1.4 billion, the year before, $1.3 billion. Yet this REIT knows how to make money: It turned a profit for 17 years in a row before its recent rough patch.
Brookfield Asset Management Inc. (BAM/A), a publicly traded company that invests mainly in real estate, acquired 233 million shares in January, almost doubling its stake. It now owns almost 24 percent of the company. I regard Brookfield’s executives as smart people. The fact that they are interested in General Growth makes me interested.
Disclosure note: I have no long or short positions in the stocks discussed in this week’s column, for clients or personally.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
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