Among U.S. companies, industrial and medical companies have high guru and insider buys during 2016. Such companies include Hertz Global Holdings Inc. (HTZ, Financial), Jazz Pharmaceuticals PLC (JAZZ, Financial) and Myriad Genetics Inc. (MYGN, Financial). These double buys have good value potential in early 2017.
What is a double buy?
Double buys, as discussed in a research article, are companies that gurus and insiders have recently purchased shares in. Legendary investor Peter Lynch once claimed that insiders may sell their shares for several reasons, but insiders only buy shares for one reason: share price appreciation. Companies that have high insider buys usually outperform companies with little or no insider buys. Additionally, double buys suggest that gurus and insiders are both bullish on the company’s stock.
To determine which sectors have the highest number of double buys, we first computed the number of net guru buys for each company during the past three months, the past six months and the past 12 months. Figure 1 illustrates the distribution of net guru sells across companies trading on the New York Stock Exchange and the Nasdaq, while Figure 2 illustrates the distribution of net guru buys.
Figure 1
Figure 2
For the rest of the statistical study, we will only focus on the “guru cluster buys,” the companies that have at least four net guru buys during the past three months. We then consider the number of insider buys during the past three months to determine which companies are double buys. The study considers three different types of double buys: double buys, CEO double buys and chief financial officer double buys. A company that has all three of these characteristics is a “triple double buy.”
The distribution of double buys across sectors
As shown in Figure 3, the past three months only featured five double buys. The health care sector featured two double buys. The industrial, technology and real estate sectors featured one double buy each.
Figure 3
When we considered the guru and insider buys from the past six months, each market sector except consumer defensive had at least one double buy, as illustrated in Figure 4. The industrial and technology sectors had five double buys, the highest number of double buys among the sectors.
Figure 4
As the industrial and health care sectors have a high number of double buys, such companies have good value potential in the short term.
Hertz Global
Florida-based Hertz Global engages in car and truck rental and leasing services in North America and Europe. The company has 98.69% institutional ownership and 12.01% insider ownership as of December 2016, suggesting that gurus and insiders are generally bullish on Hertz. Hertz is a “three month double buy” and a “six month double buy,” suggesting that gurus and insiders have invested in Hertz during the past three months and the past six months.
Although the company currently has 12% insider ownership, Hertz seldom had 1% insider ownership before June 2016, as illustrated in Figure 5. The company is a double buy just because 10% owner Carl Icahn (Trades, Portfolio) actively invested in 15 million shares of Hertz after the company reported its third-quarter earnings on Nov. 8. The guru reported the trade in a Schedule 13D filing with the Securities and Exchange Commission, as required by commission regulations.
Figure 5
During the third quarter, Hertz reported weak earnings compared to the prior-year period, including net income from continuing operations of $44 million and diluted earnings per share of 52 cents. Third-quarter 2016 net incomes (of $42 million) decreased nearly 80% from third-quarter 2015 net incomes (of $237 million). Higher vehicle depreciation expenses and provisions for taxes from continuing operations likely contributed to the sharp decline in net revenues.
Despite the poor earnings outlook, the company is “making progress” in the foundational aspects of its long-term business improvement plan, according to CEO John Tague. The company expects to reduce costs and drive revenue through several incremental actions, including rolling out electronic rental agreements and Hertz’s new Ultimate Choice rental experience.
Other industrials sector double buys
As illustrated in Figure 4, the industrials sector contains five “six month double buys,” which include Ryerson Holding Corp. (RYI, Financial), The Eastern Co. (EML, Financial) and Jason Industries Inc. (JASN, Financial). Since gurus, insiders, the CEO and the chief financial officer all purchased shares in Ryerson Holding during the past six months, the Chicago metal fabrication company is a six-month “triple double buy.”
Ryerson Holding, a metal processing and distribution company, has modest financial strength and profitability. Despite this, the company’s operating margin of 3.86% still outperforms its 10-year median of 2.39%. Ryerson Holding reported $8.2 million in third-quarter net income, about 23 cents per diluted share. CEO Eddie Lehner praised the company’s personnel for performing well in a “challenging environment,” including expansions in gross margin, net income and earnings per share from third-quarter 2015 to third-quarter 2016. Likely due to good earnings performance, Lehner invested in 2,000 shares on Nov. 8. Chief financial officer Erich Schnaufer invested in 250 shares on Aug. 19, making his company a six-month CFO double buy. Additionally, three gurus, Leon Cooperman (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Jim Simons (Trades, Portfolio), took a stake in Ryerson during the past six months. Simons increased his stake 154.46% during third-quarter 2016 after buying 344,300 initial shares during the prior quarter. The statistical study counts this as four guru buys during the past six months.
Health care sector double buys
Although the health care sector had two double buys during the past three months, Jazz Pharmaceuticals and Myriad Genetics are “six month double buys,” i.e., double buys during the past six months. The former had five net guru buys while the latter only had three during the past three months. During the past six months, Jazz Pharma had seven net guru buys while Myriad had five.
Both medical companies have at least 90% institutional ownership as of December 2016; however Jazz Pharma’s institutional ownership is more volatile. As illustrated in Figure 6, the Irish biotech company’s institutional ownership sharply declined to zero twice during the past nine years: once in June 2008 and again in June 2011. Myriad’s institutional ownership, on the other hand, steadily increased from 2001 to 2013 and then leveled off near its current value of 96.7%.
Figure 6
Salt Lake City-based Myriad Genetics likely had high institutional ownership due to strong earnings performance. The company reported total revenues of $177.5 million during its fiscal first-quarter 2017. CEO Mark Capone praised the company’s “hereditary cancer business,” which garnered several endorsements from U.S. oncologists. Additionally, Myriad realized 50% growth on its newest test products, which contributed to a “more diversified personalized medicine company” and progress on the company’s five-year strategic goals. Likely due to the company’s strong earnings outlook, Myriad currently has a financial strength rank of 7 and a profitability rank of 8. Simons increased his Myriad position by 120.05% during the third quarter, as the company shows good value potential.
Even though Jazz Pharma only has a financial strength rank of 5, the Irish company still has high profitability, with operating and net margins near a 10-year high and outperforming over 91% of global biotech companies. The company reported “substantial progress” on its corporate objectives for 2016, including solid top-line growth in the company’s commercial business and expansion in the company’s hematology / oncology portfolio with the Celator acquisition. Jazz Pharma’s total revenues increased about $34 million from third-quarter 2015 to third-quarter 2016.
See also
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Disclosure: The author has no position in the stocks mentioned in this article.
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