The most promising three-day winning streak since August 2015 ended on Thursday, partly owing to a selloff in retail shares and a small weakness in crude oil prices. Last week’s insider buying activity was extremely high, which was not at all surprising given the awful start to 2016 that U.S equities have endured. Generally, insider trading behavior is considered a key tool of fundamental securities analysis, as it indicates how corporate insiders feel about their own companies. Past research provides evidence that insider trading behavior represents a fairly strong predictor of future stock performance, especially when it comes to insider buying. Corporate insiders usually have a tendency to go against the crowd, a habit that has proven to be very profitable over the years. As a general rule, insiders are risking their own capital and diversification for one simple reason: they believe their companies’ stock is greatly undervalued by the market. That being said, the following article will discuss several noteworthy insider purchases registered at three struggling companies.
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).
Let’s begin our discussion with Prospect Capital Corporation (NASDAQ:PSEC), which has seen ballooning insider buying activity over the past several weeks and months. To start with, Chief Executive Officer John F. Barry snapped up nearly 1.12 million shares on Tuesday and 1.06 million shares last Friday at prices that ranged from $6.14 to $6.36 per share, boosting his overall holding to 16.46 million shares. Furthermore, Chief Operating Officer Michael Grier Eliasek purchased 15,000 shares on Tuesday and 30,000 shares last week at prices ranging from $5.69 to $6.30 per share. After the recent sizable purchases, the COO currently owns a stake of 672,196 shares.
Business development companies (BDCs) have performed particularly poorly in terms of stock performance over the past several quarters and Prospect Capital Corporation (NASDAQ:PSEC) is no exception; the shares of the financial services company are down by 22% over the past 12 months. However, the stock has been on a surge since February 9 following the company’s better-than-expected financial results for the second quarter of fiscal year 2016 that ended December 31. The company’s net investment income (NII) for the quarter totaled $100.9 million, increasing by $9.7 million quarter-over-quarter. Prospect Capital’s net asset value (NAV) per share dropped by only 5.11% quarter-over-quarter to $9.65 on December 31, which means that the stock trades at a huge discount to the value of its portfolio. Just recently, analysts at FBR & Co. reiterated their ‘Outperform’ rating on the stock, with a price target of $9.00, citing its attractive dividend yield among other things. The BDC pays out a monthly cash dividend of $0.08333 per share, which generates a current dividend yield of 15.17%. Nathaniel August’s Mangrove Partners reported owning 753,321 shares of Prospect Capital Corporation (NASDAQ:PSEC) through its 13F for the fourth quarter of 2015.