Reporting earnings that are below investors’ expectations once in a while generally doesn’t cause investors to change their outlook for the company over the long-term. However, if a company reports earnings that are significantly below expectations or if a company misses earnings expectations quarter after quarter, it can spook investors and crush the company’s stock eventually. During such times, if insiders step in and buy shares of their companies, not only does it help in restoring investors’ faith in the company, it also acts as an open declaration that things might not be as bad as they are being perceived. Three such companies and the recent trading activity in them are going to be the focus of this article, and they are: Joy Global Inc. (NYSE:JOY), Barnes & Noble, Inc. (NYSE:BKS), and Cherokee Inc (NASDAQ:CHKE).
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 118% over the ensuing 36 months, outperforming the S&P 500 Index by over 60 percentage points (read the 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 start with the insider buying in mining equipment manufacturer Joy Global Inc. (NYSE:JOY). On September 16, Mark Joseph Gliebe, who serves as an Independent Director of the company, acquired 5,500 shares at a weighted average price of $19.04 per share and now owns 10,748 shares of Joy Global Inc. (NYSE:JOY). The stock of Joy Global remained relatively range-bound throughout the first four months of the year, but the downward move it embarked upon beginning in May has resulted in it losing almost 64% year-to-date. A large part of that decline came after Joy Global reported its fiscal 2015 third quarter earnings on September 3. Whereas the Street was expecting the company to report EPS of $0.62 on revenue of $798.17 million for the quarter, it reported EPS of $0.54 on revenue of $792 million. Since Joy Global currently pays a quarterly dividend of $0.20, this recent correction in its stock has caused its annual dividend yield to soar to 4.63%. Jeffrey Bersh and Michael Wartell‘s Venor Capital Management was one of the hedge funds that initiated a stake in the company during the second quarter and held 768,300 shares of Joy Global as of June 30.
Moving on, Scott S Cowen, an Independent Director at Barnes & Noble, Inc. (NYSE:BKS), purchased 5,000 shares of the company on September 15 at a weighted average price of $13.08 per share. Following this transaction, Mr. Cowen now owns 17,895 shares. Although they had already lost some ground after its college bookstore business was spun-off, shares of Barnes & Noble, Inc. (NYSE:BKS) have dropped even more significantly since then, partially on back of the disappointing numbers the company posted for its fiscal 2016 first quarter on September 9. Barnes & Noble declared a $0.68 per share loss on revenue $1.22 billion, compared to analysts’ estimate of EPS of $0.12 on revenue of $999.25 million. Prior to the results, on September 4 analysts at Stifel Nicolaus had reiterated their ‘Hold’ rating on the stock. David Abrams‘ Abrams Capital Management was the largest shareholder of the company (prior to the spin-off) among the hedge funds we track at the end of June, owning almost 5.12 million shares.
Finally, let’s take a look at the insider buying at fashion and lifestyle company Cherokee Inc (NASDAQ:CHKE). Jess M Ravich, an Independent Director at the company, acquired 17,877 shares in multiple transactions at prices ranging between $14.70 and $15.50 on September 16. Accounting for these transactions, his total stake in the company now stands at 225,616 shares. Similar to the two companies mentioned earlier, Cherokee Inc (NASDAQ:CHKE)’s stock also had a major fall after it reported its latest quarterly results on September 11. However, the magnitude of the fall, at almost 40%, was quite large when compared to the above-mentioned companies. Though the EPS of $0.22 on revenue of $8.50 million that the company reported for the quarter missed analysts’ consensus estimate of EPS of $0.24 on revenue of $8.62 million only slightly, the major reason its stock took such a harsh beating was the company’s announcement that Target Corporation won’t be renewing its U.S. license after it expires in January 2017. Mark N. Diker‘s Diker Management probably anticipated a move like this, which is perhaps why the fund reduced its stake in Cherokee Inc (NASDAQ:CHKE) by 63% to 8,683 shares during the April-June period.
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