Insiders buy JPMorgan, sell Dollar General
By John Dorfman
Published: Tuesday, September 11, 2012, 12:01 a.m.
Updated: Tuesday, February 19, 2013
Dollar General Corp. (DG) has been one of the stock market's best performers the past two years. JPMorgan Chase & Co. (JPM) shares haven't gone much of anywhere. Guess which company's insiders have purchased stock lately?
It's JPMorgan, whose chairman, Jamie Dimon, bought 265,000 shares on the open market in July. Meanwhile, at Dollar General, several insiders are lightening up.
Dimon, one of the most respected CEOs in banking, has been on the defensive lately, explaining to congressional committees how his bank managed to lose at least $5.8 billion in derivatives trades. Dimon has maintained that the bank is in sound condition and will stay profitable despite that black eye.
Little noticed amid the controversy was the fact that Dimon stepped up to the plate and bought $36 million of his own company's stock on July 20 at $33.90 a share — down from about $45 at the end of March. As of Sept. 7, the shares had recovered to $39.44. So Dimon has made a $914,000 profit so far by putting his money where his mouth is.
All told, Dimon owns 5.6 million shares, worth $223 million at recent prices.
I bought JPMorgan shares this summer for some clients who prefer large-capitalization stocks. I think the noise surrounding the losses accumulated by a trader known as the “London whale” has eclipsed the bank's strong points. It stayed profitable even during the financial crisis, and has earned a profit in each of the past 20 years.
JPMorgan stock offers a dividend yield of more than 3 percent and sells for only 9 times earnings, a moderate price.
Dollar General made its initial public stock offering in December 2009. In 2010, its shares jumped 36 percent. In 2011, they rose 34 percent. This year through Sept. 7, they tacked on 21 percent. The company's profits more than doubled from 2010 to 2012, as recession-battered shoppers sought out the retailer's low-cost goods.
If there was ever a stigma associated with shopping at a place where items typically cost one dollar, it's worn off. But while the goods are cheap, the stock no longer is.
Shares in Dollar General sold for almost $50 apiece as of Sept. 7. That's 18 times earnings and 3.4 times book value.
Seven officers of the company sold some of their shares on June 11. Among them were CEO Richard Dreiling, Chief Financial Officer David Tehle and Executive Vice President Robert Ravener Jr. To be sure, these executives get their supply of stock replenished through options grants. Their open-market sales may have been intended to pay taxes related to their options positions. But I figure that executives who strongly expect a stock to keep rising would hold onto all the shares they can.
No one knows what the economy will do in 2013. If it strengthens, Dollar General probably will lose some market share to Wal-Mart, Target and other retailers at a little higher price point. The insiders may have that in mind. If you hold Dollar General, you too might want to lighten up.
This is the 11th column I have written on insider purchases and sales since mid-2001. In the first 10 columns, I discussed 38 stocks.
Of those, I recommended 23 stocks. They have gained an average of 11.7 percent while the S&P in the same periods lost an average of 0.6 percent.
The measurement periods are one year except for the three most recent columns, in which the period is from the publication date through Sept. 7, 2012.
There were five stocks in which I noted insider selling. They fell an average of 18.8 percent, compared with a loss of 1.2 percent for the S&P 500 in the same periods.
Then there were five stocks that had insider buying, but that I said I would avoid. They rose 2.8 percent but trailed behind the S&P's average gain of 15.6 percent.
All that sounds good, but I have to admit there is one more group of stocks — five stocks in which I noted insider buying but didn't give any clear opinion of my own. That group is up 45 percent versus about 14 percent for the index.
The moral of all this seems fairly clear. Insider buying doesn't guarantee a profit, nor is insider selling a fatal curse. But it is worth paying attention to both of them. It is one way of stacking the odds slightly in the investor's favor. Academic studies suggest that trades by the chief executive officer or chief financial officer have the highest predictive value.
John Dorfman is chairman of Thunderstorm Capital LLC in Boston; firstname.lastname@example.org.
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