Studies generally show that stocks bought by insiders outperform the market by a small amount on average (read our analysis of studies on insider trading). We think that this is because insider purchases should tend to happen when the insider is more confident than usual in the stock price; at other times, it makes more sense according to economic theory for them to diversify their wealth away from the company. Because of the small (but existent) effect, we like to treat insider purchases similarly to stock screens- take a quick look at which stocks insiders like and see if any of them appear to be good investments. Here are five stocks which insiders have bought recently:
Multiple insiders have been buying stock in Ingersoll-Rand PLC (NYSE:IR), which has recently announced plans to spin out its security business. In theory the spinout should make it easier for Ingersoll-Rand PLC (NYSE:IR)’s management to focus on core operations; in addition, the security business may be valued at a higher earnings multiple in the market than the rest of the company. Our analysis is that if the security business trades at a similar multiple to peer ADT, the parent company would be valued at 16 times trailing earnings with the potential to improve the business from that point.
In addition to insider trading activity, we maintain a database of quarterly 13F filings from hundreds of hedge funds and other notable investors. Using this information, we’ve found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy) and our own portfolio of hedge funds’ favorite small caps has outperformed the S&P 500 by over 30 percentage points in the last 11 months. According to our database, billionaire activist Nelson Peltz’s Trian Partners owned more than 13 million shares of Ingersoll-Rand PLC (NYSE:IR) at the end of March (find Peltz’s favorite stocks).
A member of the Board of Directors at Basic Energy Services, Inc (NYSE:BAS) bought close to 16,000 shares of the oilfield services company at the end of July. Basic Energy Services, Inc (NYSE:BAS)’s market cap is only about $480 million, but between the price of $12 per share and the fact that over 600,000 shares are traded per day there is plenty of daily dollar volume. Revenue has been down significantly, and the stock is expensive in earnings terms with a forward P/E of more than 50. With many market players bearish on Basic Energy Services, Inc (NYSE:BAS), 17% of the float is held short.