Equity transactions by corporate insiders of public corporations have received a great deal of attention from regulators, scholars and investors over the years. Assuming that insiders’ purchases and sales are partially reflective of the private information they posses, the public disclosures of their trades can serve as very informative signals to the investment community.
Past research shows that insiders’ equity purchases tend to outperform broader market benchmarks, which is the primary reason why retail investors, hedge fund vehicles and the media in general keep tabs on insider trading activity. More importantly, several research papers also conclude that the overall trading behavior of corporate insiders across firms is correlated with aggregate stock returns. This means that insider transactions tend to be informative about current macro factors and economic conditions of a country or specific industry, even though insiders’ private information may be largely firm-specific. One study finds that insiders’ net purchases (purchases minus sales) and the ratio of insider purchases to the sum of insider purchases and sales aggregated by country and calendar quarter are positively correlated with the next-quarter stock return. Without further delay, let’s examine a set of insider purchases recently witnessed at five publicly-traded 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 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).
Massive Insider Purchase of Diversified Homebuilder’s Shares
Beazer Homes USA Inc. (NYSE:BZH) was one of the five companies that witnessed noteworthy insider buying during the past several trading sessions. Non-Executive Chairman Stephen P. Zelnak Jr. purchased 50,000 shares on Monday at a price of $9.70 per share. After the recent transaction, Mr. Zelnak currently holds an ownership stake of 241,920 shares.
The market value of the diversified homebuilder has declined by 15% since the beginning of 2016. Even so, the company’s stock performance has been in recovery mode during the past several weeks, as Beazer Homes shares are up by almost 16% over the past month. Beazer Homes USA Inc. (NYSE:BZH)’s new-home closings increased to 1,364 in the three-month period ended June 30, from 1,293 recorded for the same period of the prior year. Meanwhile, the company’s average selling price increased by 4.0% year-over-year. As a result, the homebuilding revenue generated by Beazer Homes during the three months ended June 30 grew by 9.7% year-over-year to $451 million. However, the company ended the latest quarter with a backlog of 2,426 units, down by 12.2% year-over-year due to a 2.2% decline in new order activity and higher year-over-year closings. Royce & Associates, founded by Chuck Royce, upped its position in Beazer Homes USA Inc. (NYSE:BZH) by 11% during the second quarter, to 1.42 million shares.
The next two pages of this insider trading article will discuss the noteworthy insider purchases of four other companies’ shares.