One of the “Pillars” of our investment process is Buying Behavior. In essence, we want to see positive cash flows into a stock from individuals / institutions with ostensibly the best knowledge of the company and its prospects. With the exception of buying during “quiet periods” when earnings are about to be announced, “insiders” (Including corporate officers, board members, etc.) are allowed to buy and sell the stock of companies in which they are involved, subject to timely disclosure. Keep in mind that different standards exist for different countries and exchanges in terms of content and timing of disclosure.
From our perspective, there is greater informational value to buys their stock than sells. As has been said, all things being equal, insiders sell for many reasons (liquidity, diversification, etc.), but they only buy for one reason – because they think the stock is going higher. Based upon public and non-public information, they believe favorable conditions exist to propel the stock higher. That said, insiders don’t generally have a perfect track record even with better information and not all buys or buyers are created equally. Some things to consider:
- What is the current ownership position and background / experience of the individual / institution?
- What’s the buying/selling track record of the individual / institution?
- Is the buy/sell of a meaningful magnitude both on a relative and absolute basis?
In addition, we believe there are other purchasers whose transactions in a stock may be notable. Specifically, certain strategic investors with stellar track records in particular sectors or industry groups. And a company buying its shares aggressively or on an accelerated basis that results in a substantial reduction in outstanding shares. And, in some cases, a lack of selling by a large founder who refuses to part with shares for any reason can be meaningful.
So, assessing the informational value of these transactions is, like many things, part art and part science – it often takes some experience to decipher the relevance. But, as part of one pillar that we evaluate, we would rather “bet” alongside these insiders who have anted up with real money and whose actions are discoverable and measurable rather than relying on Wall Street opinion.
An example might be instructive – let’s consider recent insider buying in a company called Ulta Beauty, Inc. (ULTA). Ulta Beauty is the largest U.S. beauty retailer and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products and salon services.
In September 2019, one of the company’s directors, Charles Heilbronn, purchased $59 million of stock in open market, bringing his total ownership to $480 million, or 3.4% of the stock. The last time he purchased stock was in October 2017, following a steep decline. After his October 2017 purchase, Ulta’s stock rallied over 70% through July 2019. What perhaps was most interesting, the purchase was made through Mousselluxe SARL, an entity Heilbronn uses to manage the fortune of the Wertheimer family which controls fashion house Chanel. In 2018, Ulta and Chanel inked an agreement to bring some of Chanel’s high-end cosmetics and fragrances into Ulta stores. Given this background and expertise, we think he has significant insight into Ulta’s business prospects and its appropriate valuation.
In our assessment, this was a powerful signal with a very high “score.” Frankly, it rarely is this easy for us to identify a purchase as meaningful. Taken together with our other pillars, this high conviction buy provided the confidence to repurchase this stock into portfolios after a fundamental hiccup that created a pull-back in the stock price, but in our opinion, did not alter Ulta’s compelling growth thesis.
The views presented herein are those of Validus Growth Investors, LLC (“Validus”) as of November 2019 and are provided for informational purposes only. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. The information is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from Validus or any other investment professional.
This material is provided for informational purposes only and does not constitute a solicitation. The material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any forecasts made will come to pass.