Can A Billionaire Race Car Driver be Wrong?
Posted: September 13, 2016
I sold my shares in Penske Automotive Group (PAG) this year. But CEO Roger Penske has been buying shares like crazy.
In a series of trades in August and September, Penske added 363,784 shares to his personal holdings, worth about $17 million at the Sept. 9 price of $47.09 a share. Penske Crop., a private entity he controls, gobbled up far more.
In all, Penske and companies he controls now hold more than 32 million shares, valued at $1.52 billion.
Penske was a successful race car driver in the late 1950s and early 1960s. He went on to become even more successful as a race car owner, automobile dealer and accumulator of auto dealerships.
Penske Automotive Group, which has its headquarters in Bloomfield Hills, Mich., controls more than 350 franchised dealerships worldwide, about half in the United States and half in other countries. It specializes in luxury brands such as BMW, Lexus, Mercedes-Benz and Audi.
Going private?
I have no knowledge of whether Penske intends to take Penske Automotive Group private. Personally and through Penske Corp., he owns 35 percent of the company. In addition, Mitsui & Co. owns about 17 percent, and Penske is friendly with Mitsui management.
If Penske seeks to buy out the public shareholders, he would need to offer some premium to the existing share price, so there could be “trading juice” in this stock. There is also some good points for long-term investors, even if a takeover doesn’t happen.
As of Sept. 9, Penske Automotive Group shares traded for 12.6 times recent earnings and 11.3 times the earnings analysts project for 2017. Those are attractive multiples.
Why I sold
So why did I sell my shares? And why don’t I recommend the stock now?
I had bought in early 2015 at around $49 and sold in April of this year at about $35. I sold for three reasons.
First, earnings for the third and fourth quarters of 2015 showed sequential declines from the previous quarter. I had expected a strengthening economy to lead to rising earnings.
Second, the company’s ratio of debt to equity — which was above my normal limit in the first place — was increasing.
Third, whenever a stock drops 28 percent, as Penske Automotive Group had during my 16 months as a holder, it makes me wonder whether someone knows something I don’t. Sometimes it can mean that material nonpublic information has leaked into the marketplace.
Now the stock has rebounded to a price near where I bought it in 2015. Naturally I’m second guessing my sell decision a bit. Earnings per share rose in the first and second quarter.
The debt-to-equity ratio, however, has continued to rise. It is now 277 percent, which is definitely enough to keep me on the sidelines.
Insiders series
Watching what corporate insiders such as Penske do with their money is a logical step. I usually devote a few columns each year to peeking at insider activity.
This is the 39th such column. I have tabulated the 12-month returns for 29 columns — all those written from February 1999 through September 2015.
I have recommended 55 stocks on the basis of insider buying. They have beaten the Standard & Poor’s 500 Index, on average by 6.3 percentage points.
For 18 stocks, I noted insider buying but said I wouldn’t buy. On average, those 18 stocks have trailed the S&P 500 by 25 percentage points.
For nine stocks, I wrote about insider buying but didn’t make any recommendation or made an ambiguous comment. Those stocks beat the index by 15.9 percentage points in the 12 months after publication.
Finally, there were 21 stocks where I wrote about insider selling. Those trailed the S&P 500, but only by 0.05 percentage point.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.
Quickly noted
At Western Refining Inc. (WNR), Chairman L. Paul Foster bought 325,000 shares in August. He paid $23.59 a share; the stock is now at $26.40. Foster owns 3.4 million shares in all, worth about $89 million at the current price.
Refining stocks are peculiar beasts. They sometimes move with energy stocks in general, and at other times move in the opposite direction because, for refiners, oil is a raw material. Anyway, with Western Refining selling for only nine times earnings and yielding over 5 percent in dividends, I think it’s a good buy.
Disclosure: I have no positions in the stocks discussed in today’s column and no plans to initiate any positions in the next five days.