Are Corporate Executives Giving Away Good Trading Opportunities With These Insider Purchases?

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It seems that the U.S. stock markets have calmed down a bit and may remain this way until the Fed’s two-day policy meeting, scheduled for next week. There is a camp of Fed officials who favors raising interest rates because the labor market is improving, as well as believing that the low-rate environment might trigger financial bubbles. Meanwhile, the opposing camp believes that it is not the right time to raise rates yet, as inflation remains low and the U.S. dollar strengthens. But it appears that some corporate insiders are not worrying about whether or not the Fed will hike rates, they simply believe that their companies’ stock is undervalued. To be more specific, the Insider Monkey team identified three companies that had a large volume of insider buying yesterday and we will make an attempt to stipulate the reasons behind the insiders’ moves. These companies include Professional Diversity Network Inc (NASDAQ:IPDN), FelCor Lodging Trust Incorporated (NYSE:FCH), and Select Medical Holdings Corporation (NYSE:SEM).

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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 118% over the ensuing 36 months, outperforming the S&P 500 Index by over 60 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

Let’s begin by looking into the insider buying activity at Professional Diversity Network Inc (NASDAQ:IPDN), which is a developer and operator of online networks that provide access to employment opportunities for diverse professionals in the United States. Jim Kirsch, Chairman and CEO of Professional Diversity Network, reported acquiring 8,000 shares for $0.85 each through a single transaction yesterday, accumulating 1.12 million shares. Similarly, the company’s CFO and VP of Finance, David Mecklenburger, also added 1,500 shares at a price of $0.75 per share earlier this week to a holding that now comprises 4,500 shares. Professional Diversity Network Inc (NASDAQ:IPDN) recently posted its financial results for the second quarter, posting revenue of $10.4 million, up from $1.0 million reported a year ago. Nevertheless, despite registering this immense revenue growth, the company’s net loss widened to $778.28 million from $488.16 million. The company’s expenses ballooned in the second quarter, offsetting the 907% year-over-year revenue growth. Therefore, it might be the case that these executives believe that their company’s stock, which by the way has lost 82% year-to-date, is set for a rebound in the months ahead. There were no hedge funds in our database with a position in Professional Diversity Network as of June 30.

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