Investors should always take notice when insiders buy, particularly when it is a financial legend increasing their position, as Carl Icahn is doing with Federal-Mogul (NASDAQ: FDML
), a small cap auto parts maufucturer, in an industry where there is plenty of stiff competition from companies such as Johnson Controls (NYSE: JCI
) and Dana Holding Corporation (NYSE: DAN
Mutual fund legend Peter Lynch once advised that insider buying of shares is significant as there are many reasons for company insiders to sell a stock. These could include buying a home, paying tuition, etc... But there is only one reason for a company insider to buy a stock. That is an expectation that the share price will price.
Now, legendary investor, Carl Icahn, just bought at Federal-Mogul Corp (FDML), where he is an insider as the non-executive Board Chairman. Carl Icahn bought 165,040 shares at $13.76 a share, for a total purchase of $2.3 million. The stock price of Federal-Mogul is now under $13.30. Of significance, is that he is adding to his position.
The mean analyst target price for Federal-Mogul Corp is $19.00 over the next year. Federal-Mogul Corp is down almost 30% for the month and more than 40% for the last six months. Institutional investors own more than 97% of the stock, which is a very bullish sign. Federal-Mogul Corp is carrying loads of debt (debt-to-equity ratio of over 2) and is trading more than double digits beneath its 20-day, 50-day and 200-day moving averages, which are not bullish indiciators.
Federal-Mogul Corp (FDML) does have some better financials than Johnson Controls (JCI) and Dana Holding Corporation (DAN) At 6.81, the price-to-earnings ratio of Federal-Mogul Corp. is very low. The price-to-book ratio is just 0.97. Earnings per share growth this year is over 450%.
Since August, Carl Icahn has bought shares of Federal-Mogul Corp.(FDML) over twenty times. The stock price is now under $13.30. Icahn paid as high as $17.43 a share, according to Form 4 filings with the Securities and Exchange Commission. Federal-Mogul Corp. is down almost 30% the past month and Icahn is still buying. Investors should take note.