With the disappointing start to the year for U.S equities, one should not be surprised by the sluggish insider selling activity and strong insider buying. The robust insider buying during the first trading weeks of 2016 appears to suggest that some stocks represent real bargains at the moment. Of course, investors should avoid “catching a falling safe”, as steadily-falling stocks do not always represent real bargains that are poised for a near-term turnaround. However, individual investors should always pay close attention to noteworthy insider buying, which usually tends to reveal strong buying opportunities. After all, an insider would now purchase his or her own company’s shares without anticipating a generous return. The Insider Monkey team has identified three companies that registered noteworthy insider buying last week, so let’s take a look at what might have propelled insiders’ bullishness.
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.
Let’s kick off our discussion by examining the insider trading behavior witnessed at Anadarko Petroleum Corporation (NYSE:APC). Director Peter J. Fluor purchased 7,527 shares on Thursday at prices that ranged from $30.07 to $31.00 per share, lifting his overall holding to 112,285 shares. The Director purchased an additional 25,000 shares earlier this year. Anadarko Petroleum is one of the largest independent exploration and production companies in the world and has E&P activities in the United States, Mozambique, Algeria, Ghana, and other countries. The company’s revenue for the nine months that ended September 30 totaled $6.65 billion, a stark decline from the $15.29 billion in revenue reported for the same period a year earlier. The massive decrease was mainly attributable to lower average commodity prices and reduced natural-gas sales volumes, which was somewhat offset by higher oil and NGLs sales volumes. The decrease was also caused by asset divestitures. Although Anadarko Petroleum Corporation (NYSE:APC) had almost 40% of its remaining 2015 anticipated natural-gas sales volumes hedged on September 30, the challenging environment in the oil and natural gas markets will most likely keep beating down the company. However, the recent insider purchase might be perceived as an assurance that Anadarko Petroleum is well-positioned to tackle and endure the current environment. 70 hedge funds tracked by Insider Monkey were invested in the E&P company at the end of the third quarter, compared to 75 registered at the end of the second quarter. Ken Griffin’s Citadel Advisors LLC upped its position in Anadarko Petroleum Corporation (NYSE:APC) by 29% during the third quarter to 9.0 million shares.