There is a growing number of investors and stock market participants who believe that the U.S equity markets are overvalued at the moment. Several valuation confidence indices, which are based on investor surveys, suggest that stock market participants are more concerned about the valuation of equities than they have been since the peak of the dotcom bubble. This article is not intended to increase awareness about a potential stock market correction or bear market, as it might not come in the near-term. Clearly, most bearish views on the market often turn out to be true, as the market always comes back sooner or later, but no one can accurately foresee the exact timing of a bear market. The rally in U.S equities we have seen over the past several years makes it hard to identify potential investment opportunities, so one can refocus his or her attention on insider buying activity instead. This type of activity generally points to insiders’ confidence in the future performance of their companies, which could withstand even a bear market. With that in mind, this article will lay out the insider trades registered at three companies, and will also discuss the recent performance of the companies in question.
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 kick off our analysis by looking into the insider buying activity at Nimble Storage Inc. (NYSE:NMBL). Director William John Schroeder purchased 10,000 shares on Tuesday at a weighted average price of $10.31, taking his stake to 30,870 shares. The Director also holds an indirect ownership stake of 60,000 shares through The William J. and Marilee J. Schroeder Revocable Trust. Vice President of Worldwide Sales Denis Murphy snapped up 50,000 shares on Monday at a weighted average cost of $10.32, boosting his overall holdings to 285,150 shares.
The provider of flash-optimized storage platforms lost half of its market capitalization in one day last week, after it posted weaker-than-expected third-quarter financial figures and disappointing fourth-quarter guidance. The stock is down by nearly 63% for the year, so insiders are buying shares believing they will rebound in the future. The significant competition in the storage market started a price war between companies, which has put significant pressure on their financial results. Nimble Storage Inc. (NYSE:NMBL) reported revenue of $80.73 million for the third quarter, which was up by 37% year-over-year, but missed analyst expectations of $87.4 million. Its net loss per share came to $0.14, significantly wider than estimates of a net loss per share of $0.08. Brett Barakett’s Tremblant Capital holds a 2.14 million-share position in Nimble Storage Inc. (NYSE:NMBL) as of September 30.
Moving on to the insider buying activity at MidWestOne Financial Group Inc. (NASDAQ:MOFG), Director Larry D. Albert purchased a 7,250-share stake on Tuesday at a price of $29 per share. Executive Vice President Kurt R. Weise reported the acquisition of 31,250 shares on Wednesday for $29 each as well, 16,250 of which were actually purchased by his spouse. The Executive currently owns 16,800 shares. The company, which provides financial services primarily in the upper Midwest through its two bank subsidiaries, has had its shares advance by 11% since the beginning of the year. Even more to that, the stock is trading 10% above the insiders’ aforementioned acquisition price. MidWestOne’s financial performance mainly depends on its net interest income, which represents the difference between the interest income on earning assets and the interest expense paid on deposits and borrowings. In fact, an immediate and sustained 200 basis point increase in interest rates would result in an increase in the company’s net interest income of roughly $3.6 million, which accounts for almost 14% of the company’s net interest income for the third quarter. It is also worth pointing out that the stock is currently trading at a very attractive trailing price-to-earnings ratio of 14.95, which is significantly below the mean of 23.12 for the companies included in the S&P 500. Jim Simons’ Renaissance Technologies was one of the two hedge funds within our database invested in MidWestOne Financial Group Inc. (NASDAQ:MOFG) at the end of the third quarter, holding 97,600 shares.
WellCare Health Plans Inc. (NYSE:WCG) is another company that has seen insider activity on the buy side lately. Andrew L. Asher, Senior Vice President and Chief Financial Officer since November 2014, reported the purchase of 4,000 shares on Monday at a weighted average price of $80.71, all of which are held by a trust fund. The CFO also holds a direct ownership stake of 3,676 shares. The shares of the provider of managed care services for government-sponsored healthcare coverage are up by nearly 1% year-to-date and are trading at a rich trailing P/E ratio of 32.25. However, analysts anticipate strong earnings growth over the next several years, so this valuation metric is not entirely representative of the company’s true potential. The company’s membership figures declined by 6% year-over-year during the third quarter, but WellCare’s membership growth is anticipated to speed up next year. On October 9, the company signed a contract with the Iowa Department of Human Services to serve Iowa’s Medicaid Managed Care Program and WellCare is already being assigned members during the current quarter, while the contractual services are set to begin on January 1. 32 hedge funds tracked by Insider Monkey had positions in the company at the end of the September quarter, amassing 19.10% of its outstanding common stock. Jeremy Green’s Redmile Group owns 514,273 shares of WellCare Health Plans Inc. (NYSE:WCG) as of the end of the September quarter.