3 Noteworthy Trades as Insider Buying Heats Up Amid Record Broader Market Sell-Off

The Dow Jones Industrial Average dropped 1,078.48 points or 6.2% in the first trading week of 2016, resulting in the worst first five trading sessions of any year.  Similarly, the Standard and Poor’s 500 Index declined by 6% last week, while the Nasdaq Composite Index closed 7.3% in the red. Analysts anticipate that the high volatility and wild swings in equities will continue into the near future as the fourth-quarter earnings season kicks off this week. According to FactSet, corporate earnings of all S&P 500 companies are anticipated to decline by 4.7% on aggregate year-over-year. The worrying performance of U.S equities in the first trading week of the year was followed by an increase in insider trading activity on the buy side. Last week’s volume of insider buying almost tripled relative to the volume of buying reported a week earlier. Although the volume of insider selling also increased week-over-week, last week’s ratio of insider selling over insider buying dropped significantly compared to the ratio registered in the prior week. With that in mind, let’s look at several noteworthy insider purchases reported at three 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 (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.

To start with, Ambac Financial Group Inc. (NASDAQ:AMBC) had two insiders purchase shares this past week. Director Jeffrey S. Stein purchased 4,500 shares on Thursday at a price of $12.88 per share and currently owns 7,000 shares. President and Chief Executive Officer Nader Tavakoli snapped up 33,115 shares on Thursday and 28,381 shares on Friday at a weighted average price of $12.82, boosting his overall holding to 134,897 shares. Ambac Financial operates as a financial services holding company and mainly conducts operations via two business segments: Financial Guarantee and Financial Services. Shares of Ambac Financial Group Inc. (NASDAQ:AMBC) are down by 51% over the past year, but they seem to be trading at attractive price-to-earnings ratios. The stock trades at a trailing P/E ratio of only 1.8 (compared to the average of 21.63 for the companies included in the S&P 500) and a forward P/E ratio of 3.13, while the ratio stands at 15.75 for the S&P 500 benchmark. Nonetheless, these valuation metrics seem to reflect the company’s exposure to the Commonwealth of Puerto Rico, which defaulted on $36 million of interest on PRIFA bonds on January 1, 2016. As a result, Ambac Financial Group paid $10.3 million in interest last Monday on claims related to PRIFA bonds that the company insures. However, the company filed a lawsuit against the U.S Commonwealth, saying that “the Commonwealth unlawfully diverted tax revenues collected by the U.S. government, which are collected for specific purpose of supporting PRIFA bonds, in order to finance the government’s general accounts”. Fir Tree Partners, founded by Jeffrey Tannenbaum, reported owning 1.88 million shares of Ambac Financial Group Inc. (NASDAQ:AMBC) through its 13F filing for the third quarter.

On the following two pages of this article, we reveal the insider purchases related to Kronos Worldwide Inc. (NYSE:KRO) and Joy Global Inc. (NYSE:JOY).

Kronos Worldwide Inc. (NYSE:KRO) had one of its most influential insiders acquire shares last week. Chairman Steven L. Watson bought exactly 50,000 shares last week at prices that ranged from $4.79 per share to $5.00 per share. After the recent purchase, the Chairman holds an ownership stake of 541,652 shares. Kronos produces and markets value-added titanium dioxide pigments (TiO₂), which are used for numerous manufacturing applications such as paints, plastics, paper and other industrial and specialty products. Kronos Worldwide reported a net loss of $153.2 million for the first nine months of 2015, compared to net income of $79.3 million reported for the same period a year ago.

The substantial decrease in the company’s bottom-line results was partially attributable to lower income from operations, specific charges related to workforce reductions, and lower average selling prices. The company’s average selling prices have suffered in the past several quarters due to increased competition. Similarly, its average selling prices also suffered as a result of a higher percentage of its sales being to lower-priced export markets. A mere six hedge funds had the company’s stock in their portfolios at the end of the third quarter. Ken Griffin’s Citadel Advisors LLC owned 161,061 shares of Kronos Worldwide Inc. (NYSE:KRO) as of the end of the third quarter, and represented the largest equity holder of the company within our database at that time.

Joy Global Inc. (NYSE:JOY) is another company that had one of its top executives purchase shares this past week. President and Chief Executive Officer Edward L. Doheny II bought 10,000 shares on Wednesday for $11.20 each and currently holds 277,374 shares. The manufacturer and servicer of high productivity mining equipment for the extraction of metals and minerals has seen its shares decline by 77% over the past year and by 22% in 2016 alone. The company’s net sales for fiscal year 2015 totaled $3.2 billion, down from $3.8 billion reported for fiscal year 2014. This substantial decrease was mainly caused by a decrease in both original equipment sales and services sales. Most importantly, Joy Global generated an operating loss of $1.1 billion for FY 2015, compared to income of $527.5 million reported for the prior fiscal year. This decrease was attributable to a significant amount of impairment charges, in addition to a loss of margins on lower sales volumes, an unfavorable product mix, and lower manufacturing cost absorption. The company is a major manufacturer of underground and surface mining equipment for the extraction of coal, and the mix of regulatory pressures and low natural gas prices have put significant weight on its operations in the U.S coal market. D.E. Shaw & Co. L.P., founded by David E. Shaw in 1988, upped its position in Joy Global Inc. (NYSE:JOY) by 36% during the third quarter to 1.62 million shares.

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