It is widely known to the masses that corporate insiders have a better understanding of a company’s products, ongoing challenges and future prospects than analysts, financial advisors or other non-insiders. Tracking insider trading behavior at interested companies should play a key role in one’s due diligence process on those companies, as both buying and selling activities of a company’s insiders can offers useful insights on how these well-informed individuals feel about their company’s stock and future prospects. Even though there are numerous factors that might scare away insiders from buying their companies’ stock at the moment, including growing concerns about a global economic slowdown and the prospect of rising interest rates in the U.S., some insiders have been consistently buying shares in their own companies’ stock lately. Insider buying activity might represent a worthwhile signal that some companies’ shares are undervalued and poised to generate attractive returns in the future. Having said that, the following article will discuss the insider buying activity registered at three companies, and will also discuss the recent performance of those 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. 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.
Let’s start off our discussion by looking into the insider buying activity at CIGNA Corporation (NYSE:CI), which had not seen insiders buy stock for more than two years until last week. Director John M. Partridge reported purchasing 8,820 shares on Thursday at prices between $139.31 and $139.56 per share, including 1,620 shares that are held by a trust fund for his children. After the recent acquisition, the Director holds a direct ownership stake of 29,251 shares. At the end of July, CIGNA Corporation (NYSE:CI) and Anthem Inc. (NYSE:ANTM) announced merger agreement whereby the latter is set to purchase all outstanding shares of the former. This merger can create the largest health insurer in the United States, as it combines the second- and fifth-largest health insurance companies by revenue. Under the terms of the agreement, CIGNA shareholders are set to receive $103.40 in cash and 0.5152 Anthem share for each CIGNA common share owned. At current prices, the deal values each share of CIGNA at roughly $173, which is at least 23% higher than the current share price of CIGNA. This discrepancy reflects the risks associated with a potential failure of the merger, as this deal has been facing widespread criticism that it might harm competition. Hence, the aforementioned insider purchase might point to a higher probability that the merger will win regulatory approval. Larry Robbins’ Glenview Capital upped its stake in CIGNA Corporation (NYSE:CI) by 63% during the third quarter to 4.60 million shares.