Corporate insiders, namely executives and Board members, are usually privy to a great deal of up-to-date information about current developments or future prospects at their companies. Hence, some investors follow insider trading behavior in hopes of gaining additional insights about certain companies and their market value.
Nonetheless, the question of whether corporate insiders are making profitable trades still remains unanswered to many investors. Recent studies suggest that corporate insiders tend to act as contrarian investors by buying shares in their own companies when those shares are seemingly undervalued by Mr. Market. Put it differently, insiders mostly buy shares when most investors are dumping them. In fact, insiders tend to buy shares at low price-earnings ratios or when the value of those shares goes below their book value. Let’s put it this way, insider buying metrics point to battered and struggling companies that are poised to recover in the months ahead. Meanwhile, Insider Monkey processed the majority of Form 4 filings submitted with the SEC on Monday and identified three companies with noteworthy insider buying.
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 imitating 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).
Amazon Supplier Sees Board Member Buy Massive Block of Shares
Just several trading sessions ago, Applied Optoelectronics Inc. (NASDAQ:AAOI) registered the most valuable insider purchase of 2016. Board member Alan D. Moore purchased 105,000 shares on Thursday at prices varying from $9.80 to $10.16 per share. After the recent sizable purchase, the Board member currently holds an ownership stake of 222,542 shares.
Applied Optoelectronics Inc. (NASDAQ:AAOI) develops fiber-optic networking products for three networking end-markets that include Internet data centers, cable television, and fiber-to-the-home. Retail giant Amazon.com Inc. (NASDAQ:AMZN) accounted for nearly 53% of the company’s top line last year, with some analysts viewing the growth of Amazon Web Services as an appropriate proxy for assessing the giant’s optical equipment demand. Applied Optoelectronics has seen its market value plunge by 40% since the beginning of 2016, partially due to disappointing top- and bottom-line figures for the first quarter. The stock is priced at around 9.0-times expected earnings, significantly below the forward P/E multiple of 15.8 for the technology sector.
There were 15 hedge funds from our database with equity positions in the provider of fiber-optic networking products at the end of March, as compared to 14 registered at the end of December. The 15 asset managers amassed nearly 25% of the company’s total number of outstanding shares. Philip Hempleman’s Ardsley Partners was the owner of 1.21 million shares of Applied Optoelectronics Inc. (NASDAQ:AAOI) at the end of the first quarter.
Let’s head to the second page of this insider trading article, where we will discuss the insider buying registered at two separate companies.