8/13/2013

Insiders Are Crazy About These High-Yield Stocks

By Guest Author Insider Monkey. According to economic theory, company insiders should avoid buying stock and in fact should generally tend towards selling shares (and diversifying their wealth) unless they are confident in the company’s prospects. Insider purchases should therefore signal this confidence, and in fact studies generally show a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading). We track insider purchases and like to take a brief look at those where the purchase is large enough to be significant to see if the company might be a good buy.

Read on for our quick take on five high yield stocks which at least one insider has bought recently:

AT&T
An AT&T [T] Board member’s trust bought 9,000 shares of the company’s stock in late July. At current prices and dividend levels, AT&T pays an annual yield of 5%; in addition, the telecom giant is quite defensive with a beta of only 0.2. The company’s financials are stable as well, with growth in wireless being canceled out by a decline in the wireline segment resulting in total revenue and earnings only changing by 1-2% compared to a year ago.

We also track hedge fund activity, including through quarterly 13F filings; our research shows that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year (learn more about our small cap strategy), and our own small cap portfolio based on hedge funds’ top picks has seen an excess return of 33% in the last 11 months. According to our database, Phil Gross and Robert Atchinson owned nearly 7 million shares of AT&T at the end of March.

Freeport-McMoRan
Another large company where an insider has been indirectly buying is commodities producer Freeport-McMoRan Copper & Gold [FCX]. With the stock down 13% in the last year against a market which has returned over 20%, the current dividend yield is now 4.3%. One contributing factor to the stock’s decline has been market disapproval over the company’s recent acquisition of two oil and gas companies; in addition to normal integration risk, it’s possible that this diversification could weaken management’s focus. Paulson & Co., managed by billionaire John Paulson, reported a position of 9 million shares at the end of Q1. George Soros, Ray Dalio, and Leon Cooperman were also bullish about the stock.

Philip Morris
One of the members of Philip Morris [PM]’s Board of Directors bought 1,000 shares of stock on July 23rd at prices around $89 per share. The $150 billion market cap global cigarette company offers a 3.8% dividend yield- lower than many other cigarette companies, on the theory that there are still a good deal of growth opportunities in international markets. With growth being weak in many countries around the world, Philip Morris’s revenue and earnings decreased modestly last quarter compared to the second quarter of 2012. Billionaire Ken Griffin is among PM shareholders.

Digital Realty Trust
An insider, as well as his children, recently bought shares of technology use-focused real estate investment trust Digital Realty Trust [DLR]. Because REITs receive favorable tax treatment as long as they distribute a large share of taxable income to shareholders, they often pay high dividend yields. Digital Realty Trust’s annual yield is 5.7%, and unlike many REITs it has been consistently increasing its dividend for years even through the financial crisis. We’d note that the stock is down 21% year to date following a steep drop in July, but investors who are not already too exposed to REITs may want to consider it.

Hersha Hospitality Trust
Another real estate investment trust which we’ve recorded an insider buying recently is Hersha Hospitality Trust [HT]. Hersha, an owner of hotel properties, did not perform well during the financial crisis and recession and so its dividend still has not recovered to its levels from the middle of 2008. The yield is still somewhat high, at 4.3%, but given the other opportunities available in REITs it might not be worth the risk. Ken Heebner’s Capital Growth Management initiated a position of 6.3 million shares in Hersha between January and March.


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