Jun 20, 2022

Why Insiders Are Bullish When Nobody Else Is

Crypto meltdowns. Tech implosions. The biggest rate hike in decades.

There’s a lot of scary stuff out there.

Last Monday, the S&P 500 slid into an “official” bear market after dropping 20% from its previous high. That’s alarming if you own the index. But owning the index is not something I would ever recommend.

Instead, I focus on individual stocks—here in Smart Money Monday , in High Conviction Investor , and in my personal portfolio.

If you read past the doomsday headlines and focus on specific stocks, there are plenty of bullish signals.

The most encouraging one right now… lots of insider buying.

Insiders sell for a slew of reasons. They sell to diversify. They sell to buy new houses. They sell when they think the stock is overvalued.

But insiders only buy for one reason: They expect the stock to go up. And they’re often correct. One study found that when insiders purchased shares of their own companies, those stocks outperformed the market by more than 6% annually.

That makes sense: The more skin insiders have in the game, the more committed they are to boosting long-term profits, and the more the stock goes up.

I’m seeing strong insider buying in the auto parts industry…

Two of the industry’s biggest players—AutoZone, Inc. (AZO) and O’Reilly Automotive, Inc. (ORLY)—have had a nice slug of insider buying lately. One AutoZone board member has purchased $750K worth of shares since March. Its Chief Information Officer dropped half a million on shares in March as well. At O’Reilly, the CFO just bought $500,000 worth of stock at $600 per share.

These insiders know their businesses inside and out. And they know when their stocks are on sale.

AutoZone has climbed 43% in the past year, and O’Reilly has climbed 9%. Not bad considering the S&P 500 has sunk 13% over the same period. But at 16X analysts’ 2023 estimates, both stocks are still inexpensive for the quality of their businesses.

I’m also seeing aggressive insider buying at mortgage lender Rocket Companies, Inc. (RKT)…

You’re probably familiar with Rocket—it used to be called Quicken Loans. Today, it’s the largest mortgage originator in the country. It also makes consumer and auto loans.

Rocket was a hot IPO in 2020. And like many hot IPOs that year, the stock has collapsed. It’s dropped 61%, as you can see in the chart below.

Rocket CEO Jay Farner sees the pullback as a buying opportunity. He’s purchased nearly $10 million worth of shares since March, boosting his total holdings to 2.8 million shares worth $18 million. This is a really bullish sign.

Meanwhile, Rocket trades for a single-digit multiple of 2023 earnings. That’s too cheap. I would expect something closer to at least 15X, which is the market multiple.

We can’t talk about Rocket without touching on the mortgage industry meltdown…

2020 and 2021 were record years for mortgage originations, with around $4 trillion in new mortgages each year.

This year is different. The 30-year mortgage rate has skyrocketed from 3% to over 6%. And mortgage refinancing volume, which is driven by rates, has plummeted 70%+.

This is one of the steepest industry-wide declines I can recall. Still, it’s a cyclical downturn. People will continue to need mortgages. So, long term, it makes sense that the CEO of the biggest and best player is gobbling up stock while it’s cheap.

Last week, we saw the ultimate insider move at Continental Resources, Inc. (CLR).

CEO and founder Harold Hamm owns 83% of the oil and gas company (both directly and indirectly). On Tuesday, his family trust offered to buy the remaining shares and take the company private.

Hamm’s $70 per share offer was only 9% over the previous day’s closing price. For current shareholders, it’s not a particularly attractive offer. But it is a bullish sign for both Continental, which has soared 92% in the past year, and the entire energy sector.

I’m bullish on energy (for the first time in my career). I’ve been recommending individual energy companies here in Smart Money Monday since October. Producers are focused on growing free cash flow and returning cash to shareholders—not producing just to boost production. Despite the recent runup, some energy stocks are still dirt cheap .

I am not recommending Continental Resources today. However, Hamm’s bullish offer has bolstered my already bullish views on energy. When an industry vet ponies up $25 billion in family money, it’s because he’s ultra-confident about the company’s and industry’s long-term prospects.

I know it’s rough out there. But try to ignore the doom-and-gloom headlines. No bear market lasts forever, and they always create profitable buying opportunities. Company insiders know that—you just need to know where to look. More on that next week…

Thanks for reading,

—Thompson Clark
Editor, Smart Money Monday

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