Numerous studies conducted by reputable researchers and professors have concluded that non-insiders can achieve enhanced returns by tracking insider trading activity. Although most of those studies could be considered outdated, the reasoning behind tracking insider trading activity remains as strong and durable today. As the well-known investment guru Peter Lynch once said: “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise”. Indeed, this rule or statement still applies today, as it is hard to believe that insiders are investing their hard-earned money in their own company’s stock, particularly as it does nothing to help the diversity of their portfolio, unless they anticipate price appreciation. For that reason, this article primarily focuses on discussing several noteworthy insider purchases registered at three U.S-listed companies.
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 (read more 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.
So let’s start our discussion by examining the insider buying behavior witnessed at Stein Mart Inc. (NASDAQ:SMRT). Chief Executive Officer Jay Stein purchased 50,000 shares on Tuesday and 60,000 shares on Wednesday at prices that ranged from $6.24 per share to $6.50 per share. After the recent purchases, the CEO holds a direct ownership stake of 611,799 shares, along with an additional several million shares held indirectly. The shares of the discount retailer have declined by 57% over the past year, leading to the company appearing to be relatively cheap at the moment. For instance, the stock trades at a forward price-to-earnings ratio of 8.67, which is significantly below the average of 15.75 for the S&P 500 companies.
Stein Mart Inc. (NASDAQ:SMRT) reported total sales of $965.77 million for the 39 weeks that ended October 31, compared to $930.68 million reported for the same period a year ago. The increase in sales was mainly achieved due to a higher number of transactions and greater average unit retail prices. The company’s same-store sales for December came in higher-than-expected, yet the stock has continued to slide. Stein Mart’s comparable store sales for the five-week period that ended January 2 grew by 1.8% year-over-year, compared with the a 1.7% decrease estimated by Retail Metrics, so the company appears to be executing well. The number of smart money investors tracked by Insider Monkey with equity positions in the retailer dropped to 13 from 16 during the third quarter. Royce & Associates, founded by Chuck Royce, lifted its position in Stein Mart Inc. (NASDAQ:SMRT) by roughly 16% to 4.74 million shares during the quarter.