It can pay to pay attention to company insiders’ stock purchases

The next day, Jay Schottenstein, the company’s executive chairman, spent $14.2 million to buy 500,000 shares.

That kind of quick and decisive action gets my attention.

I believe investors would be wise to pay attention to the trades companies’ officers and directors make with their companies’ shares.

Schottenstein paid $28.32 a share on his purchase. As of Friday, they were trading at just above $30. The recent price is 16 times earnings, and just over 1.0 times revenue.

The company, which operates 456 stores in 42 states, is debt free. I’m inclined to think that Schottenstein knows what he’s doing and DSW is worth buying.

The Schottenstein family, which has had its share of internal feuding, owns large stakes in DSW and American Eagle Outfitters Inc. (AEO), a clothing chain. Jay Schottenstein is executive chairman and interim CEO of American Eagle. I’ve recommended American Eagle shares in the past, but I don’t favor them at current prices.

Freeport-McMoRan

James Moffett, chairman of Freeport-McMoRan Inc. (FCX), snapped up 100,000 of his company’s shares Aug. 28, paying $10.57 apiece. That was notable because in the past few years, Moffett hasn’t bought shares on the open market and has sometimes been a seller.

Freeport-McMoRan stock has gone from totally in favor to totally out of favor and has dropped from slightly more than $60 in 2010 to about $10 a share. Investors value it at less than book value (assets minus liabilities per share) and only five times estimated 2016 earnings.

I’ve invested in Freeport a few times in the past — unsuccessfully. Business is bad right now for both of its main products — copper and gold — but the stock is so cheap I think it will reward patient investors.

Kinder Morgan

At Kinder Morgan Inc. (KMI), a leading pipeline company, D. Richard Kinder, executive chairman, has added 400,000 shares this year. He owns 234 million shares of the company he co-founded in 1996, or about 9 percent of the outstanding shares. Much of Kinder Morgan’s pipeline network was purchased from Enron, where Kinder was a top executive in the 1990s.

Fayez Sarofim, a director and noted investment manager, picked up some shares as well.

The dividend yield on the stock — more than 5 percent — is alluring, but I wouldn’t buy this stock. It sells for 43 times recent earnings, 33 times estimated 2016 earnings, and more than four times revenue. I will climb out on a limb here — I believe it is too early to buy energy shares. Pipeline companies aren’t directly impacted by the price of oil and gas, but they are influenced by it. My guess is that oil will be in a trading range of $40 to $70 for another year or two.

Track Record

This is the 35th column I’ve written on insiders’ purchases and sales. I have tabulated the results for 25 columns, all of which were written from 1999 through a year ago.

Through the years, I’ve recommended 49 stocks whose shares insiders were buying. They have beaten the Standard & Poor’s 500 Index by 6.7 percentage points on average in the 12 months after publication.

I’ve mentioned eight stocks insiders were buying that I would avoid. They have trailed the S&P 500 by 3.7 points, on average. The exception is Republic Services, which I said a year ago I would not buy. It managed a 5.2 percent gain, compared with a 1.4 percent loss for the index.

I’ve pointed out insider selling in 18 stocks. Contrary to my expectation, they have beaten the S&P 500 by 0.07 percentage points. They were trailing the index pretty recently, but I made bad negative calls on Strayer Education Inc. in December 2013 and Madison Square Garden Co. a year ago.

For seven stocks, I reported insider buys but either made no comment or made a comment so ambiguous that a reasonable reader couldn’t be sure whether I favored purchase or not. With a red face, I must admit that those stocks, on average, have beaten the index by 17 percentage points.

The picture, in summary, isn’t perfect. But I think it indicates that paying attention to the trades corporate officers and directors make in their own shares can help improve your investment results.