U.S. equities rallied on Friday after the Bureau of Labor Statistics released a strong November jobs report, ending the week with modest gains. Analysts believe that the numbers embedded in this report support an interest rate increase by the Federal Reserve at its policy meeting on December 16. But why would market participants and the Fed in particular care about the job growth in the U.S.? Simply put, consumer spending accounts for two-thirds of the nation’s GDP figure, so it’s no wonder why the market posted massive gains on Friday. Meanwhile, both insider buying and selling activity slowed down last week relative to the previous one. Statistics reveal that insiders sold 25 times more worth of stock than they bought last week, so the ratio of insider selling over insider buying still remains at relatively high levels. Moving on to the underlying purpose of this article, insider buying activity is generally perceived as a bullish signal by most market participants. The only logical explanation as to why an insider would buy his/her company’s stock is the belief that the company’s shares are undervalued. For that reason, this article will discuss several notable insider buys registered at three companies last week.
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 102% over the ensuing 38 months, 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.
HP Inc. (NYSE:HPQ) witnessed insider buying last week for the first time in three years. Director Rajiv Gupta reported purchasing an 80,000 share-block on Wednesday at a weighted average price of $12.00, boosting his stake to 105,766 shares. HP recently completed its previously-announced separation from the combined Hewlett-Packard, so let’s try to briefly evaluate HP’s printing and personal systems businesses. It is widely-known that the demand for personal computers has been slowing down in recent years, as consumers have been holding onto their PCs for a longer period of time. Therefore, the company has developed convertible notebooks, detachable notebooks, and commercial tablets in an attempt to meet the fast-changing consumer preferences, but the slowing PC business is still impacting HP’s financial and stock performance. HP’s printing business is also challenged by the competitive pricing environment, especially by the pricing from its Japanese competitors. HP Inc. (NYSE:HPQ)’s fiscal 2015 full-year net revenue totaled $103.4 billion, which was down from $111.5 billion reported last year. Even so, HP shares are trading at a very cheap trailing price-to-earnings ratio of only 4.97, which compares with the average of 22.71 for the companies included in the S&P 500 benchmark. Peter Adam Hochfelder’s Brahman Capital added a 7.75 million-share position in HP Inc. (NYSE:HPQ) during the third quarter.
Let’s move on to the second page of this daily insider trading article, where we discuss the insider buys registered at Wal-Mart Stores Inc. (NYSE:WMT) and Norwegian Cruise Line Holdings Ltd (NASDAQ:NCLH).