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Market Tumult Hasn’t Stopped These Insiders From Buying Shares

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All major U.S. indexes closed in the red on Wednesday, “thanks” to a grim earnings forecast by Wal-Mart Stores Inc. (NYSE:WMT) that triggered a selloff in consumer-related stocks. The Dow Jones Industrial Average lost 157.14 points during yesterday’s trading session, but the market should have been expecting this outcome given analysts’ third quarter earnings estimates. It is also worth pointing out that the insider buying activity fell quite significantly during the previous trading week, and it does not seem to be higher this week either. This might point to the fact that the prospects of the companies listed on the U.S stock markets are not so bright on aggregate. However, there were a few companies that registered a high volume of insider buying activity recently which we’ll discuss in this article in an attempt to identify potentially lucrative trading opportunities.

Insider Trading 3

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 more than 102% over the ensuing three years, outperforming the S&P 500 Index by 53 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.

The first company discussed in this article is Container Store Group Inc. (NYSE:TCS), a leading retailer of storage and organization products in the United States. Chief Financial Officer Jodi Taylor reported acquiring 5,000 shares this Tuesday at a weighted average price of $12.50. After the recent purchase, the executive currently owns 33,629 shares. The shares of Container Store Group are 40% in the red year-to-date, mainly owning to the weaker-than-expected financial results for the fiscal second quarter that ended August 29. The retailer posted consolidated net sales of $195.5 million, which were up by 1.2% year-over-year. However, Container Store Group Inc. (NYSE:TCS)’s net income per diluted share came to $0.06, compared to $0.11 reported a year ago. Hence, it is quite evident that the executive is acquiring shares with the belief that the market punished them too strongly following the release of the earnings report. It might also be the case that the CFO is simply trying to convince the market that the prospects at the company aren’t as bad as they seem to be. Royce & Associates, founded by Chuck Royce, owns 1.76 million shares of Container Store Group Inc. (NYSE:TCS) as of June 30.

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The following page details the notable insider buying activity at two more companies.

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