Insiders are an interesting lot. From an investor’s perspective, corporate officers have access to information – and information has always been the key to successful investing. Company CEOs, exec VPs, board members – these are ‘insider’ positions, officers in position to know what is happening, or likely to happen, to a company and its stock.
In recent days, insiders have been picking up stocks, in a series of buys rated as ‘informative.’ These purchases are large enough to send a signal to investors – that here is a stock worth looking at. Following insider trading, using a tool like the Insiders’ Hot Stocks at TipRanks, makes a viable trading strategy. These company officers are required to publish their trades, and do so frequently; it’s a regulation that helps to level the information playing field.
Here are three of those stocks, with a look at their current status and the recent insiders moves, as an illustration. The details are interesting; let’s take a look.
First up, Xerox, is a long-time staple of the S&P 500 index, and well-known for photocopying and printers. The corona epidemic has been tough on the company as the lockdown policies shut down most office work. A company specializing in office products was bound to feel that, and Xerox reported a steep drop in earnings for the half.
So why the insider buying? For starters, Xerox has been able to keep both revenues and earnings in positive territory. While that may seem a low bar, it does put the company in an exclusive category, as the majority of companies reporting earnings in the first half reported at least one quarter with a net loss. Xerox avoided that.
On a more positive note, Xerox is actively shoring up its liquidity position. The company last week priced two offerings of senior notes, each of $550 million. The first is at 5%, and will be due in 2025, with the second at 5.5% and due in 2028. The proceeds are to be used to repay and consolidate existing debt at or before maturity.
And finally, Xerox has kept up its dividend payments during the crisis period. The quarterly payment, of 25 cents per common share, annualizes to $1 and gives a yield of nearly 6%. This is almost triple the average yield found among Xerox’s S&P peers. Xerox has kept is dividend reliable over the past three years, and the 28% payout ratio indicates that the payment is easily affordable for the company.
It appears then, that Xerox shows strong fundamentals in weather the headwinds. This could be the thought behind two recent insider purchases, that skewed insider sentiment on this stock strongly positive. Board member Cheryl Krongard spent over $244,000 on a block 15,000 shares – an impressive buy. But investing guru Carl Icahn made the truly notable purchase. He laid out $29.58 million, adding over 1.8 million shares to his existing holdings of XRX.
Covering this stock for Credit Suisse, analyst Matthew Cabral sees Xerox in a sound position for future growth. He writes, “With a resurgence in COVID-19 cases around much of the world that likely delays the return to office environments for many, we lower our EPS estimates in 2H and beyond to reflect a more muted recovery. That said… we continue to believe the share price underappreciates Xerox’s cost opportunity and FCF resiliency, as well as our view that the need for industry consolidation to improve profitability only strengthens post-COVID-19.”
Cabral rates XRX a Buy, and his $21 price target suggests a 25% upside potential for the coming year. (To watch Cabral’s track record, click here)
Overall, however, Wall Street is agnostic on XRX. The stock has a Hold from the analyst consensus rating, based on an even split – 1 each, Buy, Sell, Hold. The share price is $17.28, and the average target, at $18.33, suggests a modest 6% upside for the coming year. (See Xerox stock analysis on TipRanks)
Franchise Group (FRG)
Next up, the Franchise Group, is a holding company whose main subsidiary is Liberty Tax, the third largest US franchised tax prep company. Franchise group also owns Buddy’s Home Furnishing, Sears Outlet, and The Vitamin Shoppe, but the main business is the tax prep.
In a sense, the market crash came at just the right time for FRG. Markets bottomed out in late March, just a few weeks before Tax Day, April 15. FRG shares started regaining value on March 20, and have kept a generally upward trend ever since. The stock is now over 320% above its March low, making it a strong outperformer compared to the S&P 500.
Franchise Group has seen some strong insider buying recently, both on the individual level and the institutional. Brian Kahn, CEO, spent $9.3 million picking up 400,000 shares. His total holding in the company now totals over $10 million. On the institutional side, B. Riley FBR bought 75,000 shares for nearly $1.7 million.
Scott Buck, one of B. Riley FBR’s stock analysts, covers FRG, and writes, “Better-than-expected results were largely driven by strong retail demand in the value channel aided by enhanced unemployment benefits and one-time stimulus checks during the quarter... This does not include the potential impact of additional consumer stimulus or additional acquisitions, which we believe could provide upside to guidance... Given strongerthan-expected operating results and positive commentary on 3Q trends we are increasing our 2020, 2021 and 2022 proforma adj. EBITDA estimates…”
Buck raises his firm’s price target on the stock to $34, implying a robust 28% upside in the next 12 months. (To watch Buck’s track record, click here)
Greenhill & Co. (GHL)
Private investment bank Greenhill focuses on mergers and acquisitions, financing actions, and restructurings. Clients have included both large and small firms, and Greenhill counts big names like Alcoa, GlaxoSmithKline, Safeway, and the US Treasury among its customer base. It makes for a solid foundation to face the corona crisis.
Even with that solid foundation, however, GHL’s earnings turned negative in the first half -and are forecast to remain negative in Q3. Business and revenues have been slower in recent months, with transactions volumes falling sharply due to the economic lockdown policies.
On the insider front, there as been one major recent purchase. CEO and Chairman of the Board Scott Bok bought more than 148,000 shares, shelling out over $1.62 million dollars for the block. His purchase swings the insider sentiment on GHL into positive territory, above the sector average.
5-star JMP analyst Devin Ryan expresses concern over recent performance, however, he sees a path forward heading into next year. Ryan writes of GHL’s business prospects: “Similar to broader industry trends and commentary from other peers, the M&A market remains challenged, but management noted that M&A activity and momentum has increased in recent weeks. Capital advisory activity has also been soft, but the company is “optimistic” about a recovery in the business moving forward. On the restructuring front, Greenhill’s team remains busy, and the company highlighted four meaningful deals in the past few weeks. This business will be an important contributor to firm-wide revenues in 2H20 and into 2021, and the company believes this business could remain elevated for an extended period.”
To this end, Ryan rates GHL a Hold without providing a price target. (To watch Ryan's track record, click here)
Overall, shares are selling for $12.20 and the average target, of $9.75, suggests the opposite of the insider buying, that this is a stock on the way down, with a 20% downside potential. The Moderate Sell analyst consensus rating is based on 1 Hold and 1 Sell rating set in recent weeks. (See Greenhill stock analysis on TipRanks)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.