Who Knows a Company Better than Its Own Executives?
Posted: September 12, 2017
At Coty Inc. (COTY), a New York City-based cosmetics company, nine insiders have purchased shares in the past three months.
Coty’s brands include Calvin Klein and Gucci perfumes, CoverGirl, Clairol, Max Factor and Sally Hansen, among others. Last year it paid more than $11 billion to absorb a line of cosmetics from Procter & Gamble, making Coty the third-largest cosmetics company in the world.
Greerson Green McMullen, the company’s general counsel, bought has bought $2.6 million of Coty stock in seven transactions this year.
Laurent Kleitman, president of the Consumer Beauty Division at Coty, bought about $3 million worth a few days ago.
Meanwhile, JAB Investments BV, a private investment company based in Luxembourg, has continued its buying now owns about 37% of Coty. Bart Becht is the chairman of both JAB and Coty. JAB bought about $33 million of Coty stock in August.
This is quite an expression of faith, and it flies in the face of the adverse opinion Wall Street analysts have of Coty. Of the 16 analysts who cover the company, only five rate it a “buy.” Nine are neutral, and two dare to utter that anathema word “sell.”
Let’s suppose that Coty, after absorbing and rationalizing the big but troubled cosmetics business from Procter & Gamble, could generate (in a couple of years) net margins of 12% — the average of two large competitors, L’Oreal SA of Paris (14%), and Unilever PLC of London (10%).
Analysts expect Coty to sell $9 billion of perfume, lotion, eyeliner and so on this fiscal year. At a theoretical 12% net margin, earnings after taxes would be a little over a billion dollars.
The average stock today sells for 21 times earnings; let’s settle for 16. That would give Coty a market value of more than $16 billion, good for a 33% profit from present levels.
I don’t like to bet big money on things that haven’t happened yet. But I think Coty is a good speculation.
Facebook Inc. (FB) stock has more than quintupled since its first public offering in May 2012. So perhaps insiders would be silly not to sell shares.
They certainly haven’t been silly. The largest individual holder of regular Facebook stock is Jan Koum, who got his Facebook shares when Facebook bought the company he founded, What’s App. (Founder Mark Zuckerberg mostly owns Class B super-voting shares.)
Koum sold about $109 million in Facebook stock in late August, the latest in a long series of sales.
Sheryl Kara Sandberg, Facebook’s chief operating officer, sold $99.9 million worth at the end of July.
Analysts expect Facebook’s revenue and profits to soar this year and next. They probably will. But keep the insider sales in mind. And remember, the stock is very expensive at almost 15 times revenue.
I believe there is useful information in the records of insider purchases and sales filed with the Securities and Exchange Commission. That’s why I devote four columns a year to columns like today’s, looking at trades made by company insiders.
This is the 43rd column I’ve written on the subject, and I’ve tabulated the results for all those written from 1999 through September 2016.
The 60 stocks I’ve recommended after insiders bought shares have risen, on average, seven percentage points more than the Standard & Poor’s 500 Index.
The 22 stocks in which I wrote about insider selling have trailed the S&P 500 by 1.7%.
Rest of the Story
The results above aren’t the whole story. There were 10 stocks in which I noted insider buying but made no comment, or ambiguous remarks. Those have beaten the S&P by 20.4 percentage points.
One stock in that grey zone was United Continental Holdings (UAL), which I talked about last summer. I said to lighten up on airline stocks but to retain some exposure. UAL proceeded to rise 78% in the ensuing 12 months.
There were also 20 stocks that insiders bought but I nevertheless urged investors to stay away from. These lagged the index by 27.9 percentage points.
An example from a year ago is Penske Automotive Group (PAG), which I said had too much debt for my taste. It fell 9.1% while the S&P 500 rose 18.1%.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Disclosure: I have no current positions in the stocks discussed in this column.