Much research suggests that non-insiders can outperform broader market benchmarks by simply piggybacking insider trading behavior. However, one should avoid mimicking every insider purchase or sale, as this blind trading approach might not actually generate the desired trading profits. Individual investors would be better off if they tracked insider trading as part of a broader stock analysis process and didn’t solely rely on insider trading metrics when investing. Another piece of advice investors should take into account is that CEO’s and other top executives tend to have an information advantage over other insiders when trading their companies’ securities. Of course, special blackout windows are put in place to hinder executives and other insiders from violating laws, but their trades can still provide a general idea of how undervalued or overvalued a stock is. As a general rule, insider purchases precede a period of strong stock performance, so let’s take a thorough look at the recent insider buying witnessed 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.
The insider buying activity at Rexnord Corp (NYSE:RXN) has been speeding up over the past several months, whereas insider selling has been practically absent since late 2014. Director Paul W. Jones purchased 20,000 shares on Thursday through multiple trades, at prices in the range of $17.09 to $17.15 per share and currently holds a stake of 50,000 shares. The Director also holds 11,003 stock options with an exercise price of $26.37, which the Director will hope to be able to cash in on in the future.
Rexnord Corp (NYSE:RXN) is a growth-oriented industrial company that operates through two business lines: the Process & Motion Control platform and the Water Management platform. The former platform provides gears, gear drives, couplings, industrial bearings, tabletop and engineered chain, aerospace bearings and seals, to name just a few. Meanwhile, the latter platform manufactures products aimed at improving water quality, safety, flow control and conservation. The shares of the company have lost 36% over the past 12-month period, but they are riding a steep uptrend at the moment. Rexnord’s Process & Motion Control segment, which accounts for 56% of net sales, was severely impacted by adverse demand across some of the company’s industrial process end markets. The company’s consolidated net sales for the nine months that ended December 31 totaled $1.43 billion, down from $1.53 billion reported for the same period of the prior year. Rexnord’s diluted income per share from continuing operations reached $0.66 for the first nine months of fiscal year 2016, up from $0.54 per share reported for the same period of fiscal year 2015. It should be mentioned that the stock trades at a relatively cheap forward price-to-earnings multiple of 11.38, while that figure stands at 14.1 for the industrial sector. Charles Paquelet’s Skylands Capital cut its stake in Rexnord Corp (NYSE:RXN) by nearly 69,000 shares during the fourth quarter, to 114,000 shares.