The rule of thumb to only invest in companies you understand is one that shouldn’t be ignored. When an investor is familiar with a company or industry, there’s no better way to solidify the choice than to see whether shares are bought by those who understand the company best — the CEO, CFO and other executives, otherwise known as insiders.
Using GuruFocus’ All-in-One Screener, I searched for stocks whose insiders have bought at least 10,000 shares, and have at least one guru who has purchased shares in the past two weeks.
The following three companies are the result of the screener and may be worth a deeper look.
Allison Transmission Holdings (ALSN, Financial)
Allison Transmission is a manufacturer of commercial-duty automatic transmissions and hybrid propulsion systems for vehicle manufacturers and other sectors such as bus, emergency, construction and defense.
The Indianapolis-based company has about 1,400 dealer and distributor locations worldwide. Its latest second quarter earnings report showed a 5% increase in net sales year-over-year, driven by recoveries in the North America on-highway and off-highway end markets, as well as higher demand in service parts and support equipment.
On Oct. 3, 10% owner ValueAct Holdings purchased 550,000 shares of the company at a cost of $15,570,500. Jeff Ubben (Trades, Portfolio) is the founder and CEO of ValueAct, a hedge fund that has owned stocks in Allison Transmission since the third quarter of 2013. Owners with more than a 10% stake are required to file reports to the SEC as insiders.
Many other gurus also own shares of Allison Transmission including Lee Ainslie (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Jim Simons (Trades, Portfolio), and Paul Tudor Jones (Trades, Portfolio), all of whom added or bought holdings in the company on June 30.
Allison Transmission’s current P/S ratio is 2.7, which is close to its three-year high of 2.98.
GuruFocus rates the company’s financial strength as 8/10 and its profitability and growth as 7/10.
Gross profit for the trailing 12 months stand at $879 million, and gross margin has been steady since FY 2010 at about 44%.
Sears Holdings Corporation (SHLD, Financial)
Sears Holdings is the parent company of Kmart and Sears stores with more than 2,000 full-line and 54 specialty retail stores across the U.S.
Kmart merged with Sears in 2005 in an $11 billion deal when both retailers were struggling to stay relevant.
Bruce Berkowitz (Trades, Portfolio), a 10% owner of Sears Holdings, added 49,200 shares at a total cost of $1,297,400. Berkowitz is an equity fund manager and founder of Fairholme Capital Management.
Other gurus who own Sears stock include Murray Stahl (Trades, Portfolio) and Edward Lampert (Trades, Portfolio).
What seems to be driving the insider buys is the announcement on Oct. 2 that Sears will sell most of its 51% stake in Sears Canada, which is also struggling. The move is expected to raise $380 million in liquidity to prepare for the holiday season. Sears made similar moves earlier this year when it spun off Land’s End, a sportswear retailer.
The company’s performance over the past few years, however, doesn’t help to explain the insider buys. Gross profit has been steadily declining since FY 2007.
Net income has been negative since FY 2012, as has return on equity and return on assets.
Stage Stores is a Houston-based retailer whose department stores include Bealls, Goody’s, Palais Royal and Peebles. Stage operates 864 locations in 40 states.
Stage’s president and CEO Michael Glazer bought 10,000 shares of the company on Sept. 23 at a total cost of $162,300. The stock increased 4.68% following the move.
Steven Cohen (Trades, Portfolio) purchased a new holding in the company on Sept. 25; he now owns about 1.6 million shares, which is 5.07% of shares outstanding.
Gross profit dipped from $460 million in FY 2013 to $431 million in FY 2014. Gross margin is 25.82% for the trailing 12 months.
Stage’s long-term debt jumped five-fold year-over-year in FY 2014 to $61 million. The company currently does not have the cash and cash equivalents to cover this debt, with cash amounting only to $15 million in FY 2014.
The current P/E ratio is a sky-high 95, compared to the industry average of 13.5.
To narrow down the list of stocks and search depending on certain characteristics, use the All-in-One Screener. To find out which stocks gurus are currently buying and selling, visit GuruFocus’ Real Time Picks page.
