Why Are Corporate Insiders At These Companies Going Against The Bearish Crowd?

There is hardly any doubt that we have been in a bear market for quite some time and many investment gurus feel the same way, and feel that it is hard to see the light at the end of the tunnel at the moment. The Dow Jones Industrial Average closed 312.78 points in the red on Monday, which points to the fact that everything that happens in the U.S equity markets is not just a simple correction. Even so, many corporate executives have started to pile up more shares of their companies, which could suggest confidence in the prospects of their firms. The Insider Monkey team identified three companies that have seen unusual levels of insider buying activity lately, so it might be worthwhile to examine what might have propelled insiders to turn against the market. Ashford Inc. (NYSEMKT:AINC), Middleburg Financial Corp. (NASDAQ:MBRG), and Helmerich & Payne Inc. (NYSE:HP) are the three companies in question that recently had a large volume of insider buying.

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 more than 118% over the ensuing 36 months, outperforming the S&P 500 Index by nearly 61 percentage points (read the 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.

Going back to the three theoretically promising companies, Ashford Inc. (NYSEMKT:AINC) saw its Chief Strategy Officer buy stock last week. J. Robinson Hays III acquired 1,823 shares at prices in the range of $62.99 to $64, enlarging his holding to exactly 10,000 shares. It is also worth noting that this is the first insider purchase at this company so far this year, which may emphasize its significance. The provider of asset management and other related services to companies working in the hospitality industry recently announced a business combination with Remington Holdings, a hotel property and project management company. As a result, Ashford intends to set up a new subsidiary structure that will purchase an economic stake of 80% in Remington and the entire business of Ashford. Meanwhile, the shares of the company have lost more than 33% since the beginning of the year, so the recent insider transactions might be somewhat related to Ashford’s recently-announced combination as well as shares’ depressed value. HG Vora Capital Management, founded by Parag Vora, represents the largest equity holder of Ashford Inc. (NYSEMKT:AINC) in our database, with an ownership stake of 198,000 shares.

Let’s now turn our focus on Middleburg Financial Corp. (NASDAQ:MBRG), which had five different insiders buy stock during the previous week. However, we will examine only the most noteworthy activity. To start with, Director Alexander G. Green III reported acquiring 2,500 shares at a price of $17.50 per share, adding to his position that now stands at 9,135 shares. Another Director on Middleburg’s Board of Directors, Childs F. Burden, increased his holding by 1,000 shares to 17,320 shares through a single transaction at an approximate price of $17.82 apiece. Janet A. Neuharth, another Director, bought 540 shares for $17.70 each last week, and currently holds a 3,140 share-stake. Earlier this month, the holding company for Middleburg Bank announced its plans to repurchase up to $10 million or roughly 8% of its outstanding common stock, but as Carl Icahn suggests, share buybacks are weakening companies’ balance sheets in exchange for short-term benefits (e.g. increasing earnings per share). Even so, Middleburg does not have to invest in plants, equipment, or other future-thinking projects, which means that share buybacks are an efficient way of spending cash in its case. Jim Simons’ Renaissance Technologies is one of the few hedge funds within our database invested in Middleburg Financial Corp. (NASDAQ:MBRG), owning 25,500 shares as of June 30.

Finally, we will look into the insider trading activity at Helmerich & Payne Inc. (NYSE:HP). Gordon K. Helm, Vice President and Controller, purchased 4,000 shares at $47.01 per share on Friday. Following the transaction, the executive holds a stake of 35,768 shares. The shares of the contract drilling company have had a rough year so far, losing 31% year-to-date. Just recently, RBC Capital Markets issued a report on Helmerich & Payne, downgrading the stock to “Sector Perform” from “Outperform” and reducing its price target to $55 from $83. According to the trading and research hub, the overcapacity of land drilling and the company’s high valuation are two main factors that limit its upside potential. However, the newly-updated price target yields an upside of more than 18% from the current price, though that should serve as a medium- or long-term target rather than a short-term one. It is also true that the executive has his own views on the prospects of Helmerich & Payne and the oil industry in general, which might actually point to the stock’s turnaround in the upcoming months and years. Chuck Royce’s Royce & Associates reported an ownership stake of 1.02 million shares in Helmerich & Payne Inc. (NYSE:HP) the latest round of 13F filings.

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