Looking for stocks to buy? A good place to start is by looking at stocks with heavy insider buying.
Why? Because of something called “asymmetric information.”
Joshua White, assistant professor of finance at Vanderbilt University, said it best to InvestorPlace.com in an email:
“The importance [of insider trading] stems from a concept known as … asymmetric information. That is, insiders likely possess information about future cash flows that [outsiders] do not.”
In other words, the C-Suite executives and board members at a public company know more about that public company than you do. So, if they start buying stock in a company, it’s usually a positive signal that things are going right for the company, and that the stock price will rise in the future.
But, you can’t follow insider buying activity blindly. According to White, not all insider activity is significant. For example, White points out that insider selling could simply be executives and insiders needing to access their equity compensation, or part of a regular, pre-planned divestiture plan.
So what does Professor White suggest investors do? Look for atypical behavior and bulk group transactions. According to White:
“When investors see an insider transacting, they should first investigate whether or not this trading pattern is atypical. Investors should check to see if this particular executive tends to periodically sell shares… even in this case, insiders might still be trying to improve their wealth diversification. If multiple investors are engaging in non-typical transactions, then there is a higher probability that these trades signal information to the market.”
With that in mind, let’s take a look at five stocks to buy, which benefited form atypical and bulk insider buying in July:
- FedEx (NYSE:FDX)
- Frequency Therapeutics (NASDAQ:FREQ)
- Levi Strauss (NYSE:LEVI)
- CASI Pharmaceuticals (NASDAQ:CASI)
- Guess (NYSE:GES)
Here’s a closer look at each.
Stocks to Buy with Heavy Insider Buying: FedEx (FDX)
At logistics giant FedEx, one prominent insider made an atypically large purchase in July.
Marvin Ellison, the CEO of Lowe’s (NYSE:LOW) and a board member at FedEx, bought 2,200 shares at an average price of $164.53 on July 22, for a total purchase price of approximately $360,000.
Because of who Ellison is (a very prominent figure in the retail and logistics world).
Because Ellison hasn’t acquired any shares in FedEx in over a year, because this purchases represents an essential doubling of Ellison’s stake in FedEx and because the last time Ellison made an open market purchase in a company — in his own company, Lowe’s, back in March 2020 — was right before LOW stock exploded from $100 to $150.
In other words, this is the exact type of atypical, bulk transaction from an insider with a strong track record that you should follow.
It also helps that the fundamentals look good here.
FDX stock is cheap, trading at 0.6-times sales versus a five-year-average sales multiple above 0.8. Consumer spending trends are rebounding. Particularly e-commerce spending trends. That creates burgeoning demand for logistics solutions. FedEx is one of the largest logistics providers in the world.
Ultimately, I think FDX stock looks good here for some sizable gains over the next few quarters as improving results converge on a discounted valuation.
Frequency Therapeutics (FREQ)
Founded in 2014 by MIT and Harvard professors who happened upon a regenerative medical breakthrough, Frequency Therapeutics is one of the most explosive small-cap biotech investment opportunities in the market today.
Long story short, across the animal kingdom, many animals can regenerate throughout their entire bodies. Humans cannot. Except in their gut. Where humans produce an entirely new intestinal lining every few days.
This regeneration is driven by something called progenitor cells, which actively replicate to promote regeneration. Humans have progenitor cells all over their body. But they are dormant. Except, again, in the gut.
Frequency has developed small-molecule drugs which activate certain molecular signaling pathways in progenitor cells, thereby waking up these dormant cells across the body and triggering large-scale replication and regeneration.
The implications of this breakthrough are huge. If Frequency can truly wake up dormant progenitor cells across the whole body, then the company’s class of novel therapeutics could be used to treat degenerative conditions like hearing loss, vision impairment, muscle degradation, etc.
Needless to say, this an exciting long-term growth investment.
In a private capital raise on July 18, Frequency board member and co-founder of Alexandria Real Estate Equities (NYSE:ARE), Joel Marcus, poured $1 million into the company through his real estate business’ venture arm.
Levi Strauss (LEVI)
Retail stocks are a tough buy right now. By extension, so is LEVI stock.
Physical retail stores are closed. Consumers have cutback discretionary spending. There’s limited visibility as to when those stores will reopen, or when discretionary spending will recover to pre-pandemic levels. Consumers also aren’t going out as much, and therefore, don’t feel the need to buy new clothes all the time.
Against that backdrop, it’s tough to see Levi Strauss selling many jeans.
But that backdrop won’t last forever. It will end. Likely in 2021 with the broad distribution of a novel coronavirus vaccine. And when it does end, Levi Strauss’ sales levels will recover meaningfully in 2021/22 and after.
At just 1-times trailing sales and 14-times forward earnings, LEVI stock is fully priced for all the bad stuff happening today. But it isn’t priced for all the good stuff that will happen in 2021/22.
So buying the dip today, amid near-term weakness, with a potential Covid-19 vaccine catalyst around the corner, seems like the smart move.
Former LL Bean CEO and current Levi Strauss Board Member Christopher McCormick agrees. He bought roughly 3,800 shares of LEVI stock at $11.92 in late July, marking his first open-market purchase of LEVI stock on record.
CASI Pharmaceuticals (CASI)
Small-cap pharmaceutical company CASI Pharmaceuticals is one of the most interesting investment opportunities in the market today, with huge upside potential over the next few years.
CASI isn’t your average pharma company. The U.S. company is strategically focused on acquiring and licensing various therapeutics for use in China. Essentially, the company identifies unmet medical needs in China, scans across the global medical landscape for therapies which are being developed outside to meet those medical needs and then acquires the distribution rights for said therapies in China.
For years, this strategy — while promising — has been a “work in progress”, because it hasn’t yet produced any big products with meaningful financial results.
That may all change over the next few years.
In 2019, CASI constructed a best-in-breed portfolio of mostly pre-clinical stage hematology treatments for use in China. One of the drugs in that portfolio — EVOMELA, designed to treat multiple myeloma — launched in China in August 2019, did $4.1 million in revenue in the last five months of 2019, and did another $3.4 million in revenue in the first three months of 2020.
Meanwhile, four other drugs in that portfolio are expected to launch clinical trials in 2020. Two other drugs in the company’s pipeline are expected to launch clinical trials in 2021.
In other words, CASI is finally making progress against its goals to take foreign treatments and commercialize them in China. Importantly, this progress is happening at a time when China is taking steps to fast-track the approval of foreign medicines in China.
It should be no surprise, then, that analysts see CASI’s revenues increasing roughly 100-fold over the next decade.
It should also be no surprise that CASI’s Chairman & CEO and President together purchased almost $8 million worth of CASI stock at $1.90 on July 22.
Much like Levi Strauss, Guess is presently priced for today’s failures, but not for tomorrow’s recovery.
The reality is that, while no one is buying trendy Guess apparel today, they will start buying trendy Guess apparel once a Covid-19 vaccine arrives, retail shops open up everywhere and consumers start going out and participating in normal social activities again.
GES stock is priced for the fact that no one is buying trendy Guess apparel today. Shares trade at an all-time low 0.3-times trailing sales multiple.
The five year average sales multiple on GES stock is 0.6. That’s double today’s sales multiple. So, it’s fair to say that GES stock is not priced for things to go back to normal.
But they will. And when they do, GES stock could indeed double.
Guess who agrees? The company’s CEO Carlos Alberini. He bought over $1 million worth of GES stock on July 16.