The Standard and Poor’s 500 Index has posted losses for five consecutive days, marking the longest streak of consecutive daily declines since September 2015. The benchmark is down by roughly 14% from its all-time high that was registered in May 2015, which might explain the exploding insider buying at the moment. Insider trading watchers might have already noticed that the insider buying activity has been gaining steam over the past several days, which indicates that the situation on the ground as far as economic conditions are concerned is not as bad as market participants may think. Corporate insiders have a more accurate view of their businesses and industries than outsiders, which is one of the reasons their purchases tend to beat broader market benchmarks on aggregate. As a general rule, there is only one straightforward reason that can explain insider buying and that is that insiders believe their companies’ stocks are undervalued. For that reason, the following article will discuss the recent insider buying activity observed at three 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.
Let’s begin our discussion by looking into the recent insider trading activity at JPMorgan Chase & Co. (NYSE:JPM). In a Form 4 filing, Chairman, Chief Executive Officer and President James Dimon reported the purchase of 500,000 shares on Thursday at prices ranging from $53.13 to $53.30 per share. A total of 45,000 shares from the aforementioned block are held by family trusts, which aggregately own 567,743 shares. Moreover, 85,000 of the newly-purchased shares are currently held by a grantor retained annuity trust (GRAT), which holds an ownership stake of 4.34 million shares. Last but not least, 40,000 units from the newly-purchased block of shares are held by LLC, from which the CEO disclaims beneficial ownership except to the extent of any pecuniary interest.
The recent purchase could be seen as a sign of confidence in the bank’s underlying strength and potential, thus diminishing the negativity that has spread across the whole banking sector. The plummeting bank stocks have been the largest source of pain for U.S stock market benchmarks this year, as investors’ concerns over the slowing global and U.S economies and the depressed energy industry have been intensifying lately. The financial sector within the S&P 500 Index has lost approximately 18% thus far in 2016, while JPMorgan Chase & Co. (NYSE:JPM)’s shares have plummeted by nearly 20% year-to-date. JPMorgan shares are trading at a forward P/E multiple of 7.91, which is substantially below the average of 12.00 for the financial sector. Ken Fisher’s Fisher Asset Management reported owning 13.99 million shares of JPMorgan Chase & Co. (NYSE:JPM) through the current round of quarterly 13F filings.