How to Profit from One of the Largest Insider Stock Purchases in a Decade

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Insider purchases -- when a director or company executive buysshares  --  are some of the most closely followed events in themarket . Who better knows whether a stock isovervalued or undervalued than someone with privileged access to the firm's deals and daily business?

While there are several reasons an insider might make smaller transactions that have less to do with their prospects on the company, it is rare that an insider would take a large stake without a solid reason for optimism.

And when an insider makes one of the biggest purchases in a decade... people stand up and take notice.

James Grosfeld, formerCEO of Pulte Homes ( PHM ) , has been on theboard of directors of BlackRock ( BLK ) one of the world's largest private equity firms, since 1999. He invested $94 million for 500,000 shares of BlackRock in a series of transactions in October. Grosfeld now holds 700,538 shares worth $130 million with acost basis of roughly $189 a share. As a comparison, Grosfeld's purchase was more than twice the next largest individual insider purchase of any company during the week. The average individual purchase for the top 25 purchases that week were only $5.5 million, less than 1/15 the size of Grosfeld's purchase. So to say he is betting big on the company is an understatement.

In fact, eight of the 10 top institutional holders of BlackRock have picked up more shares recently for a totalinstitutional ownership of 85% ofshares outstanding . Compared with an average institutional ownership of 58% for large-cap companies, this is a big vote of confidence that supports the stock significantly.

So what does this insider and money managers know that we regular investors don't?

Aretail investor 's ticket to the big show
BlackRock is the world's largestinvestment manager with $3.7 trillion in assets. If the company were a country, then its assets under management would put it at the fourth largest in terms of gross domestic product, higher than Germany or France. The company owns theiShares line of exchange-traded funds ( ETFs ), the largest in the segment, with 280 funds available. In addition, the company has more than 100 investment teams in 27 countries looking forinvestments across everyasset class .

I like BlackRock as the retail investor's ticket into the exclusive world of the super-rich. Only accredited investors, those with more than $1 million innet worth or an income of more than $200,000 per year, are normally able to put their money to work inhedge funds and private equity. Shares of BlackRock, however, are available to anyone and represent an ownership stake in a set of investment strategies including hedge funds, private equity,real estate andderivative products.

The shares trade for 15.1 times trailingearnings , lower than 60% of peers in the investment services industry. While return on equity is about average for the industry at 9.3%, the firm'soperating margin of 36.9% is higher than 85% of peers in the industry. The company has more than $26 per share in cash with which it can pay its 3%dividend yield , while its assets under management have grown consistently since therecession . In addition, earnings are expected to grow by 12% next year to $15 per share, so the company may increase thedividend , which has doubled since 2007.

The shares have matched the returns for the general market this year and are up about 4.5% since the large insider purchase was disclosed. The stock has returned an annualized 19.5% during the past 10 years, outperforming the S&P 500 by more than 15% per year. The stockwill pay a dividend of $1.50 per share to investors on record Dec. 24 and could still announce aspecial dividend this year, allowing investors to avoid possibly higher tax rates in 2013.

Risks to Consider:  The financial sector is facing a tough environment going into next year. Interest rates are extremely low, meaning the spread made for loans and deposits does not leave much for revenue. Additionally, it is yet unknown how much of a drag increased oversight such as the Dodd-Frank Act will place on the sector. 

Action to Take --> The shares represent good exposure to the kind of money management for which most investors are locked out. Investors may want to spread their total allocation over a few transactions to see how the economic and regulatory environment affects the sector next year.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Basics

Referenced Stocks: BLK , PHM

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