Insider trading followers might have noticed that insider trading activity, especially on the buy side, has been quite sluggish in the first trading sessions of 2016. But why would anyone waste time for tracking insider trading behavior? What can one make of this type of activity? Generally, insider buying is perceived as a bullish signal by market participants, and it is believed to show insiders’ confidence in their companies’ future prospects and developments. It should be mentioned that insiders primarily buy shares based on their perceptions about how undervalued or overvalued their company’s stock is (which might not be accurate on some occasions), and it is highly unlikely that they trade on material non-public information (they will get caught by the SEC if they do). Even if insiders had notable non-public information and wanted to capitalize on that knowledge, they would have engaged in complex options strategies that would minimize the risks of being caught rather than investing in equities. Moving on to the underlying purpose of this article, the Insider Monkey team identified three companies that reported noteworthy insider buying in the last two weeks or so. So let’s proceed with the discussion of the insider trading activity observed at those companies and their recent performance.
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. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned 102% over the ensuing 38 months, outperforming the S&P 500 Index by more than 53 percentage points (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.
Let’s begin our discussion by examining the insider trading behavior witnessed at Layne Christensen Company (NASDAQ:LAYN). Director Nelson J. Obus, who is also the co-founder of Wynnefield Capital, snapped up 230,895 shares last week at prices that ranged from $4.94 to $5.23 per share, boosting his overall holding to 623,553 shares. Only 14,638 of these shares are held directly by Nelson Obus, while the remaining shares are held indirectly through the Wynnefield Entities. The shares of this global water management, construction and drilling company have declined 44% over the past year, but the stock has embarked on a steady uptrend since mid-December. The company’s revenues for the nine months that ended October 31 totaled $523.8 million, down $18.1 million or 3.3% year-over-year. Layne Christensen Company (NASDAQ:LAYN) has been conducting a review of its global operations and has also been undertaking cost cutting efforts so as to improve efficiency. In mid-2015, the company initiated a plan to exit its operations in Africa, as a result of the sustained decline in the minerals market. It remains to see whether the management’s cost cutting efforts and review of its operations will enable the company to achieve a much-needed turnaround. The number of hedge funds from our database with positions in the company declined to nine from 16 during the third quarter. Peter Schliemann’s Rutabaga Capital Management reported owning 2.18 million shares in Layne Christensen Company (NASDAQ:LAYN) through the latest round of 13Fs.