One strategy for selecting top stocks is to follow insider trades. After all, if insiders are diving into their own pockets, you can imagine it's because they believe the stock looks attractive. A Harvard study shows that insider purchases yield an “abnormal” return of more than 6% per year. The study authors conclude that insider buyers "have a good sense of short-term developments within their company."
The benefit of following these insiders isn't just that they have access to data that the rest of us don't necessarily know – it's that they are held accountable for their decisions. Company officials cannot make trading choices based on personal preference or profit alone. They have to be accountable to board members and shareholders – and that public wants to make money too. So when business insiders start buying stock in their own company, it sends a strong signal to investors.
With this in mind, we used the platform Investing Insights to point us in the direction of three "Perfect 10" stocks that are hitting the insiders' heads. The platform gives each stock a single-digit score, based on the addition of 6 separate factors. The factors used are known to correlate with future overperformance; when they align, it's a strong indication for buyers to consider. Let's take a closer look.
Bright Health Group (BHG)
We start in the health insurance industry, where Bright Health Group (NYSE:) takes a different approach to health coverage. Rather than focusing on the needs of large corporations and large providers, the company strives for a "consumer-centric" approach to health insurance, where policies are tailored to the needs of the end user. Since its inception in 2016, the Minnesota-based insurance company has grown rapidly and now claims more than 660,000 policyholders.
Bright's biggest news stories in recent months have been the company's IPO and 2Q21 earnings report. The IPO took place in late June, and Bright put 51.35 million shares of common stock on the public market, with an initial price of $18 each. This was below the original target range of $20 to $23 per share, and the offering raised more than $924 million in new capital.
In the Q2 report, Bright's first as a publicly traded entity, the company reported GAAP revenue of $1.11 billion, a 275% gain from the same quarter a year ago. The sales increase was driven by an equally impressive increase in membership over the course of the year; From 2Q20 to 2Q21, Bright's membership grew 220%, from 207K to over 662K. In addition to organic earnings growth, Bright also saw a one-time increase in investment income, or $58.5 million from unrealized gains in equity security.
As for the insiders, two members of Bright's board of directors have recently made major purchases, driving insider sentiment very positively. Manuel Kadre bought 50,000 shares and spent $432,500 for them. And Jeffery Immelt, best known as the former CEO of General Electric (NYSE:), bought 114,000 shares of stock for just over $1 million.
BHG has also attracted the attention of RBC's 5-star analyst Frank Morgan, who wrote after the recent release of the results: "We found nothing in the second quarter that would derail our investment thesis…Bright Health Group released solid Q2 21 results, which as expected reflect strong IFP membership growth and favorable development in wider operating expenses.Adjusted EBITDA, while still in deficit, was supportive of consensus, although we should note that seasonality assumptions varied significantly quarter on quarter.Consensus was stronger around full year earnings reflected in management's initial guidance, with MCR also in line…”
In line with these comments, Bright Rates BHG shares an outperform (i.e., buy), along with a price target of $22. Should its premise come true, a potential advantage of ~161% could be at play.
Overall, 9 analysts have rated BHG since the IPO, and of them, 7 analysts recommend a buy against 2 held positions, establishing the consensus rating for a strong buy. The stock is priced at $8.44 and their average price target of $20.11 suggests an increase of ~138% over the next 12 months. (See BCR stock analysis)
Kemper Corporation ( KMPR )
Staying with the insurance industry, we focus on Kemper Corporation (NYSE:). Headquartered in Chicago, with a market cap of $4.1 billion and nearly $15 billion in assets, this company is a major supplier of insurance products and issues policies for individuals, families and businesses. The company offers a full range of insurance policies, including property and casualty insurance, life and casualty insurance, and health insurance.
Kemper's stock has been volatile over the past year, but the company has received positive news over the past two months. In June, Kemper received an outlook upgrade from Moody's, the credit rating agency. Moody's raised Kemper's outlook from stable to positive, based in part on the company's position as "a leading non-standard auto insurer."
In July, Kemper released his 2Q21 songs. These contain both good and bad news. Total revenue, at $1.5 billion, grew 22% year-over-year and was the best print in more than two years. The red side of the ledger, however, the company suffered a serious net loss of 97 cents a share in the quarter. This was deeper than expected and much worse than net earnings of 79 cents a share a year ago. Management attributed the loss to "industry-related environmental challenges that impacted earnings." These include a significant increase in the severity and frequency of car claims, triggered by the reopening of the economy, and inflationary pressures.
However, headwinds didn't stop board member Stuart Parker from buying 25,000 shares of the stock, boosting insider sentiment. Parker paid $1.54 million for the shares.
JMP analyst Matthew Carletti is optimistic about Kemper, writing about the insurer: "We have a high level of confidence in management's ability to guide the company through what will be a more volatile 6-12 months for the industry If we move on from the pandemic, however, will likely eventually put the company in a much stronger position as it benefits from market disruptions In the shorter term, as the economy begins to reopen quickly, the auto sector faces both frequency and severity pressures as miles driven spike towards pre-pandemic standards and both parts and labor face increased inflation… For investors willing to look a little longer term, we believe Kemper is well positioned to benefit from market disruption and get into a stronger position on the other side.”
To that end, Carletti sets a price target of $90 with an Outperform (i.e. Buy) rating for KMPR stock. His target implies an increase of ~35% in the coming year.
This is a stock with a unanimous Strong Buy consensus rate, based on 4 positive reviews from the past few weeks. The stock is priced at $66.89 and their average target of $82.50 indicates there is room for about 23% rise from that level. (See KMPR stock analysis)
PROG Holdings (PRG )
Finally, PROG Holdings Inc (NYSE:), a spin-off of Aaron's Inc, the rental company, late last year. PROG, short for Progressive Leasing, began trading publicly in December 2020 as a standalone company and now consists of three segments. The first, Progressive (NYSE:) Leasing, offers consumers lease purchase options for a wide variety of products, including appliances, electronics, furniture, jewelry, cell phones, auto accessories and more. The second, Vive Financial, makes financing options available to customers who may not be suitable for traditional prime loans. And finally, Four Technologies is bringing a fintech payment platform to PROG's customers, including an option to buy now and pay later.
Since the demerger of the parent company, PROG has established itself as a leading lease-to-own company. In this vein, July was a busy month. At the beginning of the month, PROG completed its acquisition of Four Technologies, adding the "buy now and later" functionality. was integrated into the company's fintech capabilities.
In mid-July, PROG expanded its e-commerce capabilities with new app plugins to simplify the integration of retailers and customer applications. The upgrades allow customers to shop, start a lease, and checkout through the retailer's website, while providing faster decisions on lease-to-own applications.
And finally, in late July, PROG released its 2Q21 data, exceeding expectations for both sales and earnings. On the high end, the company reported total revenue of $660 million, up 10% yoy and just 0.7% above forecast. EPS, at $1.02, rose 18%, surpassing expectations of 86 cents.
Insider sentiment is positive after two major purchases of corporate officials. CFO Brian Garner has spent more than $107,000 on 2,500 shares of PRG. CEO Steven Michaels made a larger purchase, buying 7,500 shares for $321,000.
Kyle Joseph, 5-star analyst at Jefferies, points out the clear strengths that PROG has demonstrated and gives his view on the company's prospects.
“Credit performance remained strong as depreciation and amortization decreased by 4.8% at 130 basis points year-over-year and remain below PRG's long-term loss target of 6%-8%. Balance sheet remains strong as PRG closed 6/30 with net cash and $300 million of undrawn capacity on its revolver, despite buying back $49 million in stock and buying Four (BNPL provider) for $23 million in the second quarter," Joseph noted.
The analyst added: “We believe accelerated GMV growth and improved guidance indicate that PRG will benefit as the economy continues to reopen. While we expect lending to normalize, we see compensating factors including lower buyout activity/better GP margins and stronger consumer credit demand. We remain positive on PRG given its strong position in what we consider to be a fast-growing market.”
Overall, Joseph estimates PROG stock in a buy, with a price target of $67 to suggest room for ~47 upside potential for a year.
Here we look at another stock with a unanimous Strong Buy consensus rating, this time based on 3 positive ratings. PRG stock is priced at $45.72 and has an average price target of $65.67, giving the stock some upside potential of about 44%. (See PRG stock analysis)
For more ideas for stock trading at attractive valuations, visit Investing Insights.
