Every few months, I like to review the most intriguing open market purchases made by CEOs, CFOs and other key insiders. These folks typically have a clear read on business trends -- even better than the rest of us -- and their cash commitment should be a catalyst for further research.
These days, I am steering clear of insider buying at energy producers. These insiders have been premature in their hopes for a rebound, and it's simply too uncertain to know when this sector will get going again. I am, however, intrigued by other energy-related industries, such as the master limited partnerships (MLPs), many of which are more sensitive to volumes than pricing.
Here are three companies with heavy insider buying that recently caught my attention.
Kinder Morgan, Inc. (NYSE: KMI)
Richard Kinder is seen by many as one of the pioneers of the energy MLP business models. His firm has either built or acquired many pipeline assets over the years, which has enabled Kinder Morgan to be among the steadiest producers of growing dividends. So when Richard Kinder paid $3.95 million to acquire 100,000 shares in mid-March, it was surely noteworthy. According to InsiderInsights.com, he had not made any other open market purchases since May 2014.
The insider buying came after an annual analyst day held in late January, where management highlighted a broad range of development activities that should help fuel double-digit growth in the dividend through 2020, according to Goldman Sachs.
For context, KMI paid a $1.74 a share dividend in 2014, which should raise to $2.42 a share by 2017 and $3.30 by 2020. So if you bought shares, which sport a 4.4% dividend yield today, then you'd be getting a nearly 8% annual payout by 2020. That means Kinder Morgan's dividend is likely to stay above whatever levels fixed-income yields eventually deliver.
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Fastenal Co. (Nasdaq: FAST)
This is the classic "late-cycle" investment. When an economic expansion is fully underway, the company thrives due to increased industrial products distribution. If the United States economy can expand at a 3% pace in 2015 and 2016, then stocks like this one will be sharply in favor.
Fastenal has the perfect middleman business model. It sells nearly 1.5 million items from a range of manufacturers across its 2,700 store base. In effect, the company acts as a de facto sales force for many small to mid-sized manufacturers. The company's expanding footprint has led to roughly 10% annualized sales and profit growth over the past decade, according to Morningstar. To be sure, sales are off to a slow start in 2015, though analysts still anticipate double-digit sales growth in 2015 and 2016.
The soft start to the year has pushed shares down roughly 20% from the 52-week high of $52. That has caught the attention of three insiders, who have bought a collective $200,000 in stock over the past six weeks.
American Homes 4 Rent (NYSE: AMH)
Do you know the name of the America's second-largest landlord? It's Wayne Hughes, founder and chairman of this company, which along with The Blackstone Group LP (NYSE: BX), has been aggressively buying up properties in hopes of capturing rental income now and capital gains later.
To be sure, the still-tepid housing recovery has not enabled American Homes 4 Rent to begin the process of unwinding its real estate portfolio. Instead, the company is still in a buying mode, having acquired 11,000 homes in 2014 (for $1.9 billion), bringing its total ownership to 36,000 homes in 22 states.
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Hughes may be a bit disappointed with his company's share price performance, which hasn't done much since the 2013 initial public offering. In response, Hughes, and various financial entities he controls, bought a whopping $16 million in stock earlier this month.
Frankly, this is a bit of a "tweener" stock. The 1.2% dividend yield isn't enough to entice traditional income-seeking real estate investors. That's the downside of spending current cash flow on new home purchases rather than milking the business model for a full yield. And the company's $3.5 billion market value is slightly higher than tangible book value of $3.3 billion.
Hughes is clearly betting that the company's housing portfolio will generate solid cash flow off of that asset base and solid appreciation when homes are eventually sold back into the market. Analysts at Morgan Stanley see roughly 25% upside, having recently raised their rating on shares to overweight and their price target to $21 from $20.
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Other stocks with meaningful recent insider buying include:
-- H&E Equipment Services, Inc. (Nasdaq: HEES)
-- United Insurance Holdings Corp. (Nasdaq: UIHC)
-- Fox Factory Holdings Corp. (Nasdaq: FOXF)
-- Omnicare, Inc. (NYSE: OCR)
-- Solar Capital Ltd. (Nasdaq: SLRC)
-- Tile Shop Holdings, Inc. (NYSE: TTS)
-- The Bank of New York Mellon Corp. (NYSE: BK)
-- Sprint Corp. (NYSE: S)
-- Westmoreland Coal Co. (NYSE: WLB)
Risks To Consider: Insiders often try to make a statement to investors with such bold purchases, so you want to keep track and make sure that they deliver upcoming quarterly commentary that dovetails with their seemingly bullish views.
Action To Take --> All three of these companies have exposure to various domestic economic themes. Kinder Morgan is a likely beneficiary of the nation's ongoing transition away from coal and to natural gas. Fastenal is focused on industrial activity, while American Homes 4 Rent is leveraged to a housing recovery. Together, they make a broad-based basket pegged to rising U.S. economic growth.
MLPs are some of the best dividend payers that you can find... but what about the ones you didn't know about. There is a special group of securities, which we call "Hidden High Yielders," because their true dividend yield is much higher than what's listed on popular websites like Yahoo! Finance or Morningstar. Due to the way in which these firms pay dividends, their yield is shown as very low, but in actuality it is often many times higher -- you just have to know where to look. I recently released a report detailing this entire group of stocks, where to find them and a few of my favorites. To access that, click here.
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