Top JPMorgan Chase & Co. (JPM) Executive Makes Huge Stock Purchase, Plus Insider Buying Revealed at 2 Other Companies

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.

The next page of this article discusses the recent insider buying activity registered at Cavium Inc. (NASDAQ:CAVM) and HCP Inc. (NYSE:HCP).

Cavium Inc. (NASDAQ:CAVM) had not seen any officers or directors purchase shares since 2011, until this week. Arthur D. Chadwick, Chief Financial Officer and Vice President of Finance and Administration, bought 20,000 shares on Tuesday at a price of $47.77 per share, lifting his overall holding to 68,172 shares. The provider of semiconductor processors for intelligent and secure networks has seen its shares decline by 25% since the beginning of 2016. The company’s just-released fourth quarter earnings report managed to put a halt to the massive selloff.  The company has been very successful in growing its business since its inception, as its net revenue increased to $373.0 million in 2014 from $7.4 million in 2004. The increased demand in the enterprise network and data center markets, and growing demand in the broadband and consumer markets stand behind the company’s top-line growth.

However, the top-line growth has stalled of late, as Cavium reported net revenue of $100.9 million for the fourth quarter of 2015, which was down from $105.1 million quarter-over-quarter and slightly short of the $101.2 million it earned in the fourth quarter of 2014. That said, Cavium’s net revenue for 2015 did reach $412.7 million, prolonging the company’s annual growth streak. There are several features that investors should consider when analyzing a potential investment in the company’s stock. For instance, three of the company’s customers accounted for 41.4% of net revenue in the nine months that ended September 30, which may serve as reason for concern among investors. At the same time, Cavium has a limited history of profitability, which is yet another issue investors should be aware of. Columbus Circle Investors, managed by Clifford G. Fox, cut its stake in Cavium Inc. (NASDAQ:CAVM) by 481,530 shares during the fourth quarter to 572,369 shares.

HCP Inc. (NYSE:HCP) saw two different insiders make sizable purchases earlier this week. To start with, President and Chief Executive Officer Lauralee E. Martin purchased 25,000 shares on Thursday at prices varying between $25.22 and $25.58 per share, boosting her total stake to 252,223 shares. Moreover, J. Justin Hutchens, Executive Vice President and Chief Investment Officer – Senior Housing and Care, bought 10,000 units of common stock a day earlier at prices that ranged from $27.32 to $27.73 per share. After the recent purchase, the CIO currently holds an ownership stake of 35,854 shares.

The shares of the real estate investment trust (REIT) serving the healthcare industry are down by nearly 32% so far in 2016, mainly owing to worsening conditions in the post-acute/skilled nursing industry, which are hurting the REIT’s largest tenant, HCR ManorCare. The ongoing changes in reimbursement models reduce rates and lower census, and these changes are anticipated to continue impacting HCRMC’s financial performance in 2016. Earlier this month, the REIT announced a quarterly dividend of $0.575 per share, which results in an annualized distribution rate of $2.30 per share. This represents a slight uptick from the annual dividend of $2.26 per share paid last year. It should be mentioned that HCP is the only REIT in the S&P 500 Dividend Aristocrats Index, which includes companies that have increased dividends every year for at least 25 consecutive years. Meanwhile, the stock trades at a forward P/E multiple of 13.76, which is below the ratio of 15.87 for the S&P 500 benchmark. Jim Simons’ Renaissance Technologies owns 1.72 million shares of HCP Inc. (NYSE:HCP) as of the end of the fourth quarter.

Disclosure: None