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A Noteworthy Insider Purchase at JCP

November 27, 2012 | About:

The Science of Hitting

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I’m not a huge follower of insider activity; generally, I’m more focused on compensation, particularly the difficulty or solidity of the targets and the behavior that it causes. With that being said, I don’t gloss over insider action when it appears sizable and out of the ordinary – and a recent trade from a director at J.C. Penney’s (JCP) looks to fit the bill.

Javier G. Teruel joined JCP’s board of directors in February 2008; prior to his retirement in 2007, Mr. Teruel had spent the previous 35 years working in various positions at Colgate-Palmolive (CL), culminating in his succession to vice chairman in 2004. In addition, Mr. Teruel is currently on the board of directors at both Starbucks (SBUX) and Nielsen Company (NLSN), the global information and measurement company focused on helping customers understand consumers and consumer behavior.

Since joining the board, Mr. Teruel has elected to receive 100 percent of his cash retainers in shares of J.C. Penney common stock; from roughly 6,000 shares owned as of the end of fiscal 2008, Mr. Teruel’s ownership increased to 25,000 shares of the most recent proxy filing, 18,500 of which were in the form of outstanding RSU’s with rights to acquire in the coming 60 days. We see a similar pattern at Starbucks, where Mr. Teruel has been a director since 2005 – ownership is limited, with the vast majority tied to stock and option awards.

Ten days ago, this changed in a big way. On Nov. 16, with JCP shares trading just below $16, Mr. Teruel bought 125,000 shares for $2 million; to put this figure into perspective, this is more than 9x as large as the amount of director compensation he received as a director for JCP in 2011 ($217,502) and about half the amount earned in total compensation during his last year at Colgate.

From a Barron’s article on the topic:

"InsiderScore.com, which tracks insider purchases, thinks the buy is a big deal:

'Teruel’s purchase represents a rare show of conviction for an insider at JCP and the buy lit up our transaction scoring algorithm, garnering the highest score possible, a 4.0. Teruel’s background in the Consumer Goods sector makes him an appealing buyer, as does his membership on the boards of SBUX and NLSN, where he can gather important consumer behavioral insights.'”

As I noted above, I don’t get too excited about insider purchases – many times, the dollar amount (in comparison to the director or executives overall net worth) could make the transaction much less meaningful that it looks at first glance. In the case of Mr. Teruel, it’s probably safe to assume that his net worth is in the tens of millions considering his salary at Colgate in his final years as an employee. With that being said, there’s no indication that he’s made such a sizable move during his directorship at other public companies – and I certainly see this as a positive sign for long-term investors in JCP common stock.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

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