These Companies’ Insiders Are Acting As Value-Oriented Investors

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.

Let’s now turn our focus on AAR Corp. (NYSE:AIR), a provider of products and services to commercial aviation, government, and defense markets. Director Marc J. Walfish purchased 20,000 shares for $18.84 each earlier this week. After the recent transaction, the director currently owns 97,158 shares valued at $1.89 million. It is also worth pointing out that this is the first insider purchase at the company over the past few years, which clearly emphasizes its importance. The shares of AAR have been on a decline since mid-July, with the stock having lost more than 29% since the beginning of the year, and the recently-released financial results for the company’s fiscal first quarter of 2016 did not put an end to the downtrend. The company posted sales of $377.8 million for the quarter, compared to $395.1 million reported a year ago. Similarly, the company’s income from continuing operations came to $8.2 million, down from $11.8 million reported in the same quarter a year ago. Daniel Lewis’ Orange Capital added a 598,000 share-position in AAR Corp. (NYSE:AIR) to his portfolio during the June quarter, making it one of the largest equity holders of the company from our database.

Finally, Ollie’s Bargain Outlet Holdings Inc. (NASDAQ:OLLI) saw two of its directors acquire stock this week. Robert N. Fisch acquired a new stake of 5,000 shares at a price of $16.25 per share. At the same time, Thomas T. Hendrickson purchased a 9,116 share-stake at prices ranging from $16.19 to $16.77. However, it is also worth pointing out that the retailer went public this July by selling 8.9 million shares of common stock to the public at an IPO price of $16.00 per share. The stock reached price levels of over $21 following its IPO, but the gains have been fading away over time. Even so, the shares of Ollie are still trading above the $16 price level. Considering the fact that the company delivered a strong financial performance during the second quarter of 2015, these directors might have acquired the company’s shares on weakness. Many believe that the insider buying activity at newly-public companies is not that informative, but it appears that both directors tend to be acting in the fashion of value-oriented investors in this case.

Disclosure: None