The Dow Jones Industrial Average dropped 1,078.48 points or 6.2% in the first trading week of 2016, resulting in the worst first five trading sessions of any year. Similarly, the Standard and Poor’s 500 Index declined by 6% last week, while the Nasdaq Composite Index closed 7.3% in the red. Analysts anticipate that the high volatility and wild swings in equities will continue into the near future as the fourth-quarter earnings season kicks off this week. According to FactSet, corporate earnings of all S&P 500 companies are anticipated to decline by 4.7% on aggregate year-over-year. The worrying performance of U.S equities in the first trading week of the year was followed by an increase in insider trading activity on the buy side. Last week’s volume of insider buying almost tripled relative to the volume of buying reported a week earlier. Although the volume of insider selling also increased week-over-week, last week’s ratio of insider selling over insider buying dropped significantly compared to the ratio registered in the prior week. With that in mind, let’s look at several noteworthy insider purchases reported at three companies.
Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35%-to-45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012 (read more details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.
To start with, Ambac Financial Group Inc. (NASDAQ:AMBC) had two insiders purchase shares this past week. Director Jeffrey S. Stein purchased 4,500 shares on Thursday at a price of $12.88 per share and currently owns 7,000 shares. President and Chief Executive Officer Nader Tavakoli snapped up 33,115 shares on Thursday and 28,381 shares on Friday at a weighted average price of $12.82, boosting his overall holding to 134,897 shares. Ambac Financial operates as a financial services holding company and mainly conducts operations via two business segments: Financial Guarantee and Financial Services. Shares of Ambac Financial Group Inc. (NASDAQ:AMBC) are down by 51% over the past year, but they seem to be trading at attractive price-to-earnings ratios. The stock trades at a trailing P/E ratio of only 1.8 (compared to the average of 21.63 for the companies included in the S&P 500) and a forward P/E ratio of 3.13, while the ratio stands at 15.75 for the S&P 500 benchmark. Nonetheless, these valuation metrics seem to reflect the company’s exposure to the Commonwealth of Puerto Rico, which defaulted on $36 million of interest on PRIFA bonds on January 1, 2016. As a result, Ambac Financial Group paid $10.3 million in interest last Monday on claims related to PRIFA bonds that the company insures. However, the company filed a lawsuit against the U.S Commonwealth, saying that “the Commonwealth unlawfully diverted tax revenues collected by the U.S. government, which are collected for specific purpose of supporting PRIFA bonds, in order to finance the government’s general accounts”. Fir Tree Partners, founded by Jeffrey Tannenbaum, reported owning 1.88 million shares of Ambac Financial Group Inc. (NASDAQ:AMBC) through its 13F filing for the third quarter.