A signal from insider transactions we pay special attention to is opportunistic purchases by long-serving Directors. These signals don’t show up often but when they do, we have seen impressive subsequent performance. Sometimes it takes several weeks or months for this performance to materialize as insiders often tend to be early with their purchases. We saw this with Jay Hoag’s purchases of Netflix (NFLX), Germán Larrea Mota-Velasco’s purchases of Southern Copper (SCCO), Harold Hamm’s purchases of Continental Resources (CLR) and Bruce Sachs’ purchases of Vertex Pharmaceuticals (VRTX), which we discussed in our December 2020 Special Situations Newsletter.
We saw this pattern once again last week when William R. Shepard, an independent Director of the derivatives exchange CME Group (CME) purchased $8.27 million worth of stock at an average price of $170 per share. This was the largest insider purchase at the CME Group in over ten years and Mr. Shepard’s largest purchase since his August 2010 $1.22 million purchase at a split-adjusted price of $49 per share.
Mr. Shepard has served on The CME Group’s Board of Directors since 1997 and has been a CME Group member for 45 years. The CME Group is the world’s largest derivatives marketplace that facilitates the trading of equity, currency, interest rate, energy, agriculture and metals futures. Given that it is a marketplace, the expectation is that it should be able to weather downturns better than most companies but that has not always been the case. During the 2007-2009 bear market, the stock was down nearly 80% peak to trough. The stock is down almost 35% peak-to-trough during this downturn.
The CME Group has always traded at a premium valuation in light of its excellent net margin, which was an astounding 54% during the trailing twelve months. Revenue in Q3 2022 was up nearly 11% on account of a 26% increase in trading volume. After the recent pullback, the stock trades at a forward EV/EBITDA of 19. Looking ahead, while both revenue and earnings are expected to grow, revenue in 2023 is expected to grow just a little over 3% to $5.21 billion. Mr. Shepard probably holds a more optimistic view of the business compared to consensus analyst estimates. However as alluded to above, insiders often tend to be early and I am going to add The CME Group to my watchlist to see if it presents an attractive opportunity to invest in the near future.
Welcome to edition 646 of Insider Weekends. Insider buying increased significantly last week with insiders purchasing $176.33 million of stock compared to $66.42 million in the week prior. Selling also increased significantly to $5.11 billion compared to $1.01 billion in the week prior. Most of this increase was driven by Elon Musk’s $3.95 billion sale of Telsa (TSLA).