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Major Insider Buying Suggests These Companies Are Poised To Explode

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Traders, investors, and other market participants have been busy anticipating what the Fed will do with interest rates as its two-day policy meeting looms. Unquestionably, this is the most closely scrutinized and highly anticipated decision on U.S interest rates in recent history. There are growing concerns that raising rates for the first time since 2006 will trigger a new wave of volatility in the equity markets, as net long positions in VIX futures reached a record high of 37,925 contracts on September 13. However, the Dow Jones Industrial Average gained 228.89 points on Tuesday, which seems to be pointing to a recovery in the stock markets. Some corporate executives embarked upon the upward wave of yesterday’s trading session by buying up big chunks of their companies’ stock, suggesting that these companies have a strong outlook over the long-term. Layne Christensen Company (NASDAQ:LAYN), FBR & Co (NASDAQ:FBRC), and Sunedison Inc (NYSE:SUNE) were the most noteworthy companies with a large volume of insider buying activity on Tuesday, and the following article will attempt to find out what has executives so bullish on their companies.

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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.

We will begin by looking into Layne Christensen Company (NASDAQ:LAYN), a company that had two different insiders acquire stock on Tuesday. Michael J. Caliel, President and Chief Executive Officer of Layne, purchased 7,500 shares at a price of $6.09 per share, boosting his stake to 12,500 shares. One of the company’s Directors, Nelson J. Obus, acquired 10,000 shares for $5.96 apiece as well. After yesterday’s transaction, the Independent Director currently holds 252,802 shares. The shares of Layne have lost more than 38% year-to-date, partly owing to the steady downtrend that afflicted the stock since mid-July. The company’s freshly-reported financial results for the second quarter of fiscal 2016 put even more downward pressure on the stock. The company’s revenues dropped by 4.2% year-over-year to $176.3 million, while its reported loss came to $18.2 million, compared to $55.0 million a year ago. To sum up, it appears that the market overreacted to the recent financial results and the insiders are either attempting to hinder the stock’s downfall or trying to profit from the potentially undervalued stock. Peter Schliemann’s Rutabaga Capital Management holds 2.18 million shares of Layne Christensen Company (NASDAQ:LAYN) as of June 30, which account for 1.96% of its entire portfolio.

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