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What Insider Buying Activity at These Three Companies Tells You About Their Prospects?

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It is highly probable that the major U.S. stock indexes will fall this Monday, as investors may worry about the effects of the Paris terror attacks on consumer confidence and some of the global economies. Although this heartbreaking even may not have a long-lasting effect on the U.S. economy and stock markets, it can be expected that the demand for gasoline will ease up as people may hold back from traveling. Moving on to the underlying purpose of this article, the insider buying activity was significantly higher last week than it was in the prior one, which may suggest some insiders find valuations very attractive at the moment. The Insider Monkey team identified three companies with unusual insider buying last week, so let’s proceed with the discussion on what might have guided those companies’ insiders to acquire stock.

Insider Trading 3

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 37 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.

Knowles Corp (NYSE:KN) is one of the aforementioned firms that saw insiders purchase stock last week. Director Donald Macleod purchased 15,000 shares on Thursday for $15.92 each, bumping up his stake to 33,309 shares. Hermann Eul, another Member of Knowles Corp (NYSE:KN)’s Board of Directors, bought 1,250 shares on Friday at a price of $15.39 per share. The Director currently holds a stake of 10,609 shares. Just recently, JMP Securities cut its price target on the stock to $27 from $29, following the release of the company’s third-quarter earnings report. The supplier of microphones and speakers disclosed earnings per share (EPS) of $0.16 on revenue of $294.6 million, compared to analysts’ expectations of EPS of $0.11 on revenue of $297.9 million (read more details). The shares of Knowles are down 34% for the year, while the recently-updated target price yields an upside of at least 75%. Knowles lost some of its charm among the hedge funds tracked by Insider Monkey during the second quarter, as the number of smart money investors with stakes in the company decreased to 16 from 21 during the three-month period. Ric Dillon’s Diamond Hill Capital reported owning 517,488 shares in Knowles Corp (NYSE:KN) via its 13F filing for the third quarter.

The second page of this daily insider trading article discusses the insider buying activity at Citizens Financial Group Inc. (NYSE:CFG) and Ambac Financial Group Inc. (NASDAQ:AMBC).

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