Savvy investors would be wise to adjust their fundamental stock analysis by incorporating the tracking of insider trading activity as well, in order to get a feeling of the future prospects of relevant companies. Due to the fact that insiders are prohibited from “short-swing” transactions (buying and selling shares within a six-month period), they might buy shares when confident about the long-term performance of their companies, and sell shares when they see a gloomy outlook in the future (although selling shares can be done for a variety of reasons). In the following article we’ll be discussing three companies that have seen unusual clusters of insider trading recently. Specifically, KapStone Paper and Packaging Corporation (NYSE:KS) and Agree Realty Corporation (NYSE:ADC) witnessed notable insider buying activity yesterday, whereas Morningstar Inc. (NASDAQ:MORN) had a large volume of insider selling on the same day.
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 32 months, outperforming the S&P 500 Index by 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 by looking into the insider activity at KapStone Paper and Packaging Corporation (NYSE:KS), a company that manufactures and sells containerboards, corrugated products, and specialty paper products. Roger W. Stone, Chairman of the Board and Chief Executive Officer since the company’s inception in 2005, reported purchasing 100,000 shares on August 24 at a price of $20.91 each, adding to a stake that now totals nearly 3.20 million shares. The shares of KapStone have embarked on a steady downtrend since the end of February, losing nearly 30% year-to-date. It might be the case that the CEO is attempting to stem the free-fall of the company’s stock by assuring the market that the shares are undervalued. But it might also be the case that Roger Stone truly believes that the company is set for a rebound or is worth far more than the market is giving it credit for. KapStone recently completed the purchase of Victory Packaging/Golden State Container, a national distributor of all types of packaging. Following the completion of this deal, the team of KapStone, led by Stone, believes that the company is well-positioned for future growth, which might suggest the stock represents a good buy-low candidate. Youlia Miteva’s Proxima Capital Management added a new 1.01 million-share position in KapStone Paper and Packaging Corporation (NYSE:KS) to its portfolio during the second quarter.