As a general rule, corporate insiders buy shares in their own company when they believe the share price undervalues the earnings potential of the company’s business. Directors and executives usually buy shares during periods when their company is doing poorly, so heavy insider buying tends to disclose attractive entry points for non-insiders. Of course, there may be instances when insiders overestimate the future prospects of their companies, but past research shows that insider purchases beat broader market gauges on aggregate. Non-insiders can also capitalize on insider trading data by incorporating insider trading analysis as part of their stock selection process, but insider trading-focused strategies are suitable for long term-oriented investors only. Insider Monkey examined most Form 4 filings submitted with the SEC on Thursday and identified three companies with voluminous insider purchases.
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 imitating 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).
Caterpillar Witnessed Insider Buying for the First Time in Four Years
Assuming our database has not experienced any glitches in the past several years, Caterpillar Inc. (NYSE:CAT) had not witnessed any insiders purchase shares since mid-2012 until this week. Board member David L. Calhoun purchased 25,000 shares on Tuesday at prices that ranged from $77.22 to $77.66 per share, boosting his overall holding to 33,129 shares.
The manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives has seen its market value gain 14% since the beginning of 2016. Caterpillar recently reduced its sales and revenues guidance for 2016 to the range of $40 billion-to-$42 billion from the previous guidance of $40 billion-to-$44 billion despite seeing higher commodity prices and signs of improvement in construction equipment in China. The company’s global workforce is down roughly 8,600 positions since the end of the third quarter of 2015, with a number of 15 facility closures or consolidations being announced since then. However, Caterpillar plans to downsize production and workforce even further in response to lower end-user demand. Earlier this week, the construction-equipment maker revealed plans to close five U.S. plants and cut back on 820 positions.
Just several days ago, Argus Research upgraded Caterpillar to a ‘Buy’ rating from ‘Hold’, suggesting an upside potential of 20%. A strong management team and healthy balance sheet, as well as mounting signs of improvement in various parts of Caterpillar’s business stand behind the recent upgrade. The shares of Caterpillar are currently trading at a forward P/E ratio of 22.4, above the forward P/E multiple of 18.2 for the Construction Machinery & Heavy Trucks sector. Ray Carroll’s Breton Hill Capital acquired a new stake of 7,659 shares of Caterpillar Inc. (NYSE:CAT) during the March quarter.