The question most investors do not have an answer to is whether the recent downfall in U.S equities will be short-lived or will mark the beginning of a longer-term bear market. The Dow Jones Industrial Average and the S&P 500 Index are in correction territory at the moment, after declining by approximately 8% since the beginning of the year. It appears that both individual and larger-scale investors are afraid of a stock market meltdown similar to the one experienced back in 2007, so they want to get out of equities as quickly as possible. Yes, there are several reasons investors should worry, which include the sustained decline in energy prices, a relatively strong U.S dollar, and sluggish global economic growth. But it all comes down to the ability of the U.S economy to keep growing in the face of numerous headwinds. Meanwhile, several publicly-traded companies witnessed noteworthy insider purchases recently, which could point to attractive investment opportunities. As a general rule, insider buying should be perceived as a bullish signal, as an insider is not going to invest his or her hard-earned capital in their company’s stock without expecting an attractive return, especially at the risk of being less diversified. So let’s proceed with the discussion of the insider buying registered at those three struggling companies.
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 (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.
Xcerra Corp (NASDAQ:XCRA) had one of its top executives buy shares this past week. President and Chief Executive Officer David G. Tacelli acquired 30,000 shares on Friday at a weighted average cost of $5.17, lifting his overall holding to 1.10 million units of common stock. The company provides test and handling capital equipment, interface products, test fixtures, and services to the semiconductor, industrial, and electronics manufacturing industries. To be more specific, the company mainly offers test solutions to electronics manufacturing companies that use semiconductors and printed circuit board (PCB) test systems as main components. Xcerra Corp (NASDAQ:XCRA)’s shares are down by 35% over the past year, mainly owing to the company’s weak financial performance. Although the stock trades at a relatively cheap trailing price-to-earnings ratio of 16.31 (the ratio is 21.04 for the S&P 500 companies), one should not overlook the company’s disappointing revenue growth in recent quarters. Xcerra’s net sales for the three months that ended October 31 totaled $78.40 million, down from $116.22 million reported a year earlier. The aforementioned valuation metric bears no importance if considering the weakening demand for the company’s products. However, Xcerra’s recent insider buying might suggest that the company is just about to embark on a recovery path, so investors should keep a close eye on the company’s upcoming earnings reports. A total of 19 hedge funds from our system were invested in the company at the end of the third quarter, amassing 14.20% of its shares. Brett Hendrickson’s Nokomis Capital, which owned 2.53 million shares in Xcerra Corp (NASDAQ:XCRA) on September 30, was one of the most bullish investors of Xcerra within our database.
Let’s head to the next two pages of this daily insider trading article, where we discuss the insider buying registered at Earthstone Energy Inc. (NYSEMKT:ESTE) and Esperion Therapeutics Inc. (NASDAQ:ESPR).