Three Stocks With Heavy Insider Buying Activity; Should You Follow These Insiders?

The odds of a Federal Reserve rate hike by the end of the year are constantly diminishing. China registered the slowest quarterly Gross Domestic Product (GDP) growth since the financial crisis, Japan’s annual export growth slowed significantly in September, the inflation rate in Europe has slowed down, and the U.S. labor market is not tightening as fast as previously anticipated. Therefore, it seems that the cheap money mode of the biggest economies in the world will spur a new of wave of interest in riskier asset classes such as stocks and corporate bonds. The Dow Jones Industrial Average gained 157.54 points on Friday, thanks to the strong earnings results from several crucial players within the technology sector. This comes after a spike of more than 320 points on Thursday, so there are numerous features pointing to the continuation of the bull market. In the meantime, some companies’ insiders have also been pouring more cash into stocks recently, which could somewhat suggest that their companies have a bright future ahead. Thus, this article will discuss the insider buying activity at three U.S.-listed companies.

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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 102% over the ensuing 3 years, outperforming the S&P 500 Index by more than 53 percentage points (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.

Let’s begin our discussion by looking into the insider buying activity at Allegheny Technologies Incorporated (NYSE:ATI). Director John R. Pipski reported acquiring 7,000 shares on Thursday at prices of $13.69 and $13.74 per share, 2,000 of which were purchased by a family partnership. Following the recent transactions, the Director currently holds a direct ownership stake of 18,543 shares. The shares of the steel producer have declined by 48% since the beginning of the year and appear to be in a bottoming-out phase at the moment. Just recently, Deutsche Bank downgraded Allegheny Technologies Incorporated (NYSE:ATI) to ‘Hold’ from ‘Buy’ and reduced its price target to $15 from $20, as a result of weaker-than-expected third quarter results. Similarly, the investment firm asserted that the company is not expected to begin its recovery until the second half of the next year, so the Director might also be betting on a long-term turnaround. Kerr Neilson’s Platinum Asset Management was one of the top shareholders of Allegheny Technologies Incorporated (NYSE:ATI) at the end of the second quarter within our extensive database, owning 5.42 million shares.

The next page will discuss the insider buying activity at two other companies.

We can refocus our discussion on Arctic Cat Inc. (NASDAQ:ACAT), a manufacturer of snowmobiles and all-terrain vehicles that saw three insiders acquire shares on Friday. Director D. Christian Koch bought 1,500 shares at a weighted average price of $18.93 and currently owns 8,663 shares, which also include a few thousands of restricted stock units. Moreover, Chief Executive Officer and President Christopher T. Metz bought a 7,500-share block at prices ranging from $16.75 to $17.05, enlarging his stake to 77,201 shares. Lastly, Chief Financial Officer Christopher J. Eperjesy added 4,000 shares, acquired at a weighted average price of $18.05, to his holding that now comprises 15,591 shares. Arctic Cat Inc. (NASDAQ:ACAT)’s stock has lost nearly 44% year-to-date, partly owing to the disappointing third-quarter earnings report. However, the stock is currently trading at a forward price-to-earnings ratio of 12.23, well below the median of 18.42 for the Standard and Poor’s 500 companies. Hence, it seems that these insiders are buying shares believing that they are undervalued by the market. Alexander Mitchell’s Scopus Asset Management owned 279,400 shares of Arctic Cat Inc. (NASDAQ:ACAT) as of June 30.

Lastly, we will discuss the insider buying activity at MGIC Investment Corp. (NYSE:MTG), which has seen its stock climb by slightly more than 2% since the beginning of the year. Director C. Edward Chaplin acquired a 5,000-share stake on Thursday at a price of $9.46 per unit. This move comes after the private mortgage insurer reported its third-quarter earnings report. MGIC Investment Corp. (NYSE:MTG) posted total revenues of $269.5 million, compared to $235.1 million reported a year ago. Similarly, the company’s adjusted net income came to $124.7 million or $0.29 per diluted share, compared to $72.0 million or $0.18 registered in the same quarter a year ago. It is also worth pointing out that the stock is trading at a deep-discount at the moment, considering that it is trading at a forward P/E ratio of 9.86. Even so, one should not forget that this ratio is not an ideal proxy for value, as it does not consider future growth rates. John Griffin’s Blue Ridge Capital reported owning 12.76 million shares of MGIC Investment Corp. (NYSE:MTG) through the 13F for the June quarter.

Disclosure: None