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Keep tabs on what insiders do

John Dorfman
| Tuesday, Dec. 6, 2011

Entertainment mogul Barry Diller likes Coca-Cola.

Not the drink, the stock. Last month Diller bought 100,000 shares of Coke stock on the open market, paying about $67 a share. That was $6.7 million worth of stock, bringing his total holding of Coca-Cola shares to about $115 million.

Diller is the former chairman of Paramount Pictures Corp. and Fox Inc. He heads IAC/Interactive Corp. and Expedia Inc. He has been a board member of Coca-Cola Inc. for almost a decade.

Since Diller is a successful fellow, should you do as he did and buy Coca-Cola shares• Before you do, here's some perspective. Diller's is the only insider purchase of Coke shares since July. During that time, there have been 14 insider sales.

Five of the sales have been 50,000 shares or more. The biggest seller was Douglas Alexander, head of Coke's North American Group.

So what's my recommendation on Coca-Cola• The company has a pre-tax profit margin of 40 percent -- spectacularly good and about the same as Microsoft's. I wouldn't buy it at the present price of about $66, but if it falls below $57 -- perhaps on another European debt scare, or if the U.S. budget mess takes a turn for the worse -- I would recommend it.

Let's look at some other companies where insiders have been buying or selling shares recently.

At Kinder Morgan Energy Parters LP (KMI) in Houston, Chairman Richard Kinder consolidated his grip on the company by buying 19.7 million shares on Nov. 22. That pre-Thanksgiving feast cost him about $564 million.

Kinder Morgan is a pipeline powerhouse. Its specialty is natural-gas pipelines, and in October, it agreed to pay $21 billion to buy El Paso Corp. If consummated, the transaction will make Kinder Morgan the largest gas-pipeline company in the United States.

Kinder owns 238 million shares, or close to a third of the company. His portion is worth more than $7 billion now.

I wish him luck, but I suspect he may be a poorer billionaire in a year or two. The stock is riding too high in my opinion, at about 10 times revenue and 7 times book value.

Dollar General Corp. (DG), a discount retailer based in Goodlettsville, Tenn., has been one of the great stock-market success stories of the past two years. The shares, which went public in November 2009, are up 90 percent from the initial offering through Dec. 2. That includes a gain of 30 percent this year.

Hard times for the country have been harsh for most retailers, but not for discounters like Dollar General. Now that the stock has done well for two years, it may be a good time to take some profits.

That's what some insiders did. In a coordinated open-market sale in September, eight officers sold shares, as did Goldman Sachs Group Inc. and KKR & Co. (Each firm owns more than 10 percent of the company.)

CEO Richard Dreiling sold 170,000 shares for proceeds of $5.6 million. David Tehle, the chief financial officer, sold 45,981 shares for about $1.5 million.

The insiders sold at about $33. The stock is now near $40. At the current price, it is creeping close to 20 times earnings, compared to a price/earnings ratio of 13 at rivals Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT).

Jefferies Group Inc. (JEF), a New York brokerage house, has been fighting off rumors that it is in financial trouble. In my opinion, the firm has been doing a good job in fighting the rumors - for example, by publishing detailed figures on its exposure to European bonds.

One indication of faith in the company has come from Leucadia National Corp., a New York City holding company that invests in businesses when they are out of favor. Leucadia (in which my clients and I own shares) bought up 1.5 million shares of Jefferies stock last month at prices around $12. The stock is a few cents higher now.

Almost every U.S. brokerage house relies more on borrowed funds than I would prefer. The debt-to-equity ratio at Jefferies is about 12, compared with 9 at Merrill Lynch & Co. (MER) and 7 at Goldman Sachs. (GS).

With Jefferies stock selling for less than 10 times earnings and less than book value, I think it is a good speculative buy.

One other brief note: American Eagle Outfitters Inc. (AEO), a young people's clothing retailer based in Pittsburgh, has had some insider buys lately at prices near $11. Back in 2007, there were tons of insider sales as the stock hit a high near $29.

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