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These Companies’ Insiders Are Acting As Value-Oriented Investors

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Clearly, we did not get off to a good start at the beginning of the final quarter of the year, with all major U.S indexes declining by more than 1% in today’s trading session. The lower-than-expected number of job additions in September are fueling concerns about the strength of the U.S economy, which is weighing on investors. To be more specific, 142,000 jobs were created during the latest month, well below the previously-anticipated number of 203,000 jobs. Unquestionably, the freshly-released jobs report was not what market participants wanted to see, so it is highly likely that there will be more pain along the way. In the meantime, some companies’ corporate insiders have begun hoarding more shares lately, which might be suggesting that the market greatly undervalues their companies’ stock. The Insider Monkey team pinpointed three companies with high insider buying activity, which are represented by Legacy Reserves LP (NASDAQ:LGCY), AAR Corp. (NYSE:AIR), and Ollie’s Bargain Outlet Holdings Inc. (NASDAQ:OLLI). Let’s now take a thorough look at the activity of the insiders at these companies and attempt to stipulate what might have guided them to buy stock amid the current financial turmoil and high uncertainty.

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 118% over the ensuing 36 months, outperforming the S&P 500 Index by nearly 61 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 kick off our analysis by looking into the insider buying activity at Legacy Reserves LP (NASDAQ:LGCY). Director Kyle D. Vann reported buying 25,000 units representing limited partner interests at a weighted average price of $4.17, increasing his stake to 80,334 units. Legacy Reserves is a master limited partnership (MLP) that owns and operates oil and natural gas properties, so it is no surprise that its shares have lost most of their value this year. In fact, the stock has plummeted by more than 65% year-to-date, so the director might be acquiring these shares or units on weakness at the moment. Even though the environment Legacy Reserves operates in is not that favorable, some investors might consider investing in the stock bearing in mind that MLPs generally pay out most of their income to shareholders. Alec Litowitz and Ross Laser’s Magnetar Capital is the largest shareholder of Legacy Reserves LP (NASDAQ:LGCY) within our extensive database, holding roughly 2.35 million shares as of June 30.

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