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Tale of the Tape: Insider Buying at Three Large Companies

Sunday - 6/16/2013, 1:35pm  ET

One of my weekly rituals as an investor is to review insider activity through the SEC Form 4 filings. Corporate executives and board members (“insiders”) are required to fully disclose their stock purchases pursuant to the Securities Exchange Act of 1934 and the Investment Company Act of 1940.

Individual investors can benefit greatly from studying insider activity. Whether you are taking a sector view or considering an individual company, learning to read the SEC filings can be a powerful resource and strengthen your overall investment thesis.

Here are three large insider purchases that caught my eye in recent days:

Multinational cruise company

The Miami, FL headquartered Carnival Corporation is the largest cruise company in the world, with a portfolio of cruise brands operating in North America, Europe, Australia, and Asia. Readers may recognize Carnival by its chairman and CEO Micky Arison, the owner of professional basketball team Miami Heat which is competing in the NBA Finals.

Back on May 20, Carnival provided new earnings guidance for the second half of 2013. Aggressive marketing has caused Carnival to lower its ticket prices, thereby reducing its full year revenue guidance by 2 to 3% compared to prior guidance of flat Year-over-Year (YoY) revenue. The competitive ticket pricing will have a significant effect on earnings, however, which Carnival reduced to a $1.45 to $1.65 range from a prior $1.80 to $2.10.

Shares of Carnival fell nearly 10% following the news as investors adjusted their positions for lowered expectations. However, insider buying at Carnival leads me to believe that recent selling is overdone.

Carnival board member Randall J. Weisenburger stepped in on May 24 amidst the negativity, purchasing 40,000 shares of stock for $32.96 per share. The transaction value amounted to a massive $1,318,000 when the stock was purchased, one of the largest insider purchases in recent weeks.

While only time will tell if Carnival can recover its former earnings growth, shareholders are paid to wait with a 3.0% dividend.

Online advertising giant

Readers may reminisce about AOL from its tech-bubble heyday when the technology giant became one of the world’s most valuable companies. While AOL no longer maintains its former dominance, the company is one of the largest producers of digital content and sellers of display advertising.

On May 8, AOL reported first quarter 2013 results with impressive profit and revenue growth across nearly all business lines. Earnings rose to $0.32 compared to $0.22 during the first quarter of 2012, while advertising revenue grew 9% year-over-year.

AOL is transitioning from a subscription-based model used at Internet providers such as Earthlink and Time Warner Cable to an advertising model like Google. Total revenue grew 2% compared to the first quarter 2012 as gains in advertising (+$29.1 million) offset declines in subscription revenue (-$16.3 million). As fewer customers use AOL’s “You’ve Got Mail” online service, the company is gaining market share in the digital advertising market.

In addition to fundamentals, recent insider buying adds optimism that AOL’s transition is going well. Board member Frederic Reynolds bought 28,000 shares of stock for $34.26 following the first quarter earnings release. The transaction value amounted to $959,000 when the shares were purchased on May 29. Prior to retirement, Reynolds was an executive vice president and chief financial officer at CBS Corporation, a leader in media advertising.

Despite being less than 1% the size of Google, I believe AOL is gaining traction among advertisers. I recommend buying the shares on the back of the strong quarter and recent insider purchases.

Embattled oil and natural gas producer

Formerly regarded as a safe haven for income investors, shares of Linn Energy have taken a nose dive in recent weeks as questions have arisen regarding the company’s accounting methods and overall profitability.

Shares began their precipitous drop in early May following a feature Barron’s Magazine article which argued that company fundamentals are deteriorating. Energy production at Linn Energy has stalled in 2013, leading to inadequate cash flow generation in order to meet the $2.90 annual payout for investors.

Oil and gas production fell to 796 million ft³/day during the first quarter, below prior guidance of 827 million ft³/day. The company also restricted itself by stating it reviews cash distributions on an annual basis, rather than a quarterly one. This rigid policy makes a perceived financial shortfall more apparent.

LinnCO board member Terrence Jacobs stepped in on May 30 and purchased 15,000 shares of Linn Energy for $34.20 per share. The total transaction value amounted to $513,000 when the stock was purchased.

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