Insiders Are Selling at the Sexy Six

John Dorfman

The label “the Sexy Six” was coined by Ned Davis Research to refer to half a dozen stocks currently riding a wave of intense popularity.

Here are total returns for the six through June 2 this year:

Alphabet Inc. (GOOG) has returned 26%.

Amazon.com Inc. (AMZN) has popped 34%.

Apple Inc. (AAPL) has roared ahead 35%.

Facebook Inc. (FB) has advanced 34%.

Microsoft Corp. (MSFT) has gained 17%.

Netflix has zipped up 33%.

These six stocks have accounted for a disproportionate share of the gains in the U.S. stock market this year. Skeptics worry that narrow market leadership is a classic danger sign for the market.

A peek at what executives at the Sexy Six are doing should add a bit to that worry, in my opinion. In the past month, six insiders have sold $945 million in Amazon shares; four insiders have sold $831 million at Microsoft, and eight insiders have sold $264 million at Facebook, according to Bloomberg data.

General Electric

Can a turnaround finally be at hand for General Electric Co. (GE)? The stock hit $58 in 2000 and then fell to below $9 in the bear market of 2008-2009. It has recovered haltingly to about $28 in the past eight years.

CEO Jeffrey Immelt is reemphasizing the company’s industrial roots, and has jettisoned the commercial lending operation that enriched the company before the Great Recession.

In May, three GE executives bought shares, including Immelt, who purchased 100,000 shares on the open market.

Last year, both sales and earnings rose at GE, after a decade in which the overall trend was down. Analysts expect further progress this year and next. The stock is not cheap in my judgment, and profitability is still lackluster, but things are moving in the right direction.

Advance Auto Parts

Insiders at Advance Auto Parts Inc. (AAP) were active buyers in May. The company’s CEO, Tom Greco, bought 16,000 shares at an average price near $135, spending about $2.16 million. He took the reins of the company last August, after previously serving as CEO of Frito-Lay North America.

Based in Roanoke, Virginia, Advance is the largest U.S. auto-parts retailer, with more than 5,000 stores. Its revenue declined slightly in 2016 and earnings were down.

Many of the insider buys occurred right after the company announced the company announced quarterly earnings that fell short of analysts’ estimates. I figure that’s a good sign.

The stock, which nearly touched $200 in 2015, sits at about $138 today. Greco appears to think he can improve on the company’s 7.7% pretax profit margin. I would rather bet with him than against him.

GNC

With about 9,000 stores, GNC Holdings (the initials stand for General Nutrition) is a leader in the sale of vitamins, minerals, herbs, and nutritional supplements. Insiders made a flurry of buys in May.

Robert Moran, the company’s interim CEO, was the largest buyer, picking up 300,000 shares at an average of $6.72. He also got the best price of the ten insiders who purchased shares in May. The rest paid $6.80 to $7.45 a share. The stock as of June 2 stood at $7.58.
The next biggest purchase was 150,000 shares for Tricia Tolliver, chief financial officer. These two buys were of special interest to me because I believe insider buys by chief executives and CFOs have the greatest predictive value.

Now, the bad news. The company’s sales have been flat since 2013 and earnings have been in a declining trend since 2015. Worse, GNC has more debt than equity.

I feel there should be at least a profitable trade here, if not a longer-term investment. The stock is very cheap, at four times earnings, and the cluster of insider buys was impressive.

Track Record

This is the 42nd column I’ve written about insider trades, and I can tabulate one-year returns on all of them written from the start of 1999 through June 2016. Stocks that I’ve recommended and that showed insider buying have beaten the Standard & Poor’s 500 Index by 6.1 percentage points.

Stocks with insider buying that I said to avoid have trailed the index by more than 25 percentage points.

Stocks with insider buying where I made no recommendation (or made an ambiguous comment) have done very well indeed, beating the index by 20 points.

Finally, stocks where I noted selling have trailed the index, but only by a fraction of a point.

Disclosure: I have no direct positions in the stocks mentioned today. I own most of the Sexy Six stocks indirectly through an exchange-traded fund, personally and for most clients.

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