Buy Beaten-Down Stocks With Insiders: Three Stocks to Buy at Deep Discounts

All major U.S stock indexes closed sharply in the green on Monday, which might suggest that equities are set to continue their bull course at least through the end of the year. The Dow Jones Industrial Average gained 165.22 points in the first trading session of November, and has advanced by more than 9% since the beginning of the fourth quarter. In the meantime, some companies’ insiders have also regained confidence in the stock market and started piling up more shares of their companies. Generally, insider buying is relatively straightforward to interpret: insider buys represent signs of potential future stock price appreciation. Even so, this type of activity should be closely examined and accurately interpreted prior to making any moves, as insiders may also make the wrong judgement in some instances. Thus, let’s proceed with the discussion of the insider buying activity at three U.S-listed companies.

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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 102% over the ensuing 37 months, outperforming the S&P 500 Index by more than 53 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 kick off our discussion by looking into the insider trading activity at furniture and electronics rent-to-own company Rent-A-Center Inc. (NASDAQ:RCII). Chief Executive Officer Robert Dale Davis snapped up a 10,000-share block on Friday at a price of $18.42 per share. After the recent transaction, the CEO currently holds a stake of 75,595 shares. Meanwhile, Director Jeffery M. Jackson purchased 1,200 shares on Thursday at a price of $17.76 apiece, enlarging his holdings to 2,700 shares. The shares of Rent-A-Center Inc. (NASDAQ:RCII) are down by 49% year-to-date, partially due to its disappointing third quarter earnings report. Just a few days ago, KeyBanc Capital Markets downgraded the stock to ‘Sector Weight’ from ‘Overweight’, citing the company’s disappointing performance in the third quarter. Even so, the stock is currently trading at a trailing P/E ratio of only 9.74, compared to the ratio of 22.65 for the S&P 500. Hence, the aforementioned insiders may be buying shares on weakness. Hirzel Capital Management, founded by Zac Hirzel, held its stake in Rent-A-Center Inc. (NASDAQ:RCII) unchanged during the second quarter at 2.07 million shares.

The next page of the article discloses the insider buying activity at two struggling companies.

Pitney Bowes Inc. (NYSE:PBI) is another company that had an insider acquire shares last week. President and Chief Executive Officer Marc B. Lautenbach acquired a total of 12,007 shares on Friday at a weighted average price of $20.81. Following the purchase, the CEO owns a stake of 132,432 shares, which includes 5,523 shares held in a joint account with his spouse. On October 29, the technology company offering products and solutions that power commerce released its third quarter financial results, which were quite well received by the market. Pitney Bowes Inc. (NYSE:PBI)’s revenues declined by 8% year-over-year to $870 million, while its adjusted earnings per diluted share came to $0.43, compared to $0.51 reported a year ago (also included $0.08 per share of tax benefits). Hence, the company managed to keep its bottom-line flat despite generating lower revenues. However, the stock is relatively cheap at the moment if considering its trailing P/E ratio of 10.73. Iridian Asset Management, founded by David Cohen and Harold Levy, was one of the top shareholders of Pitney Bowes Inc. (NYSE:PBI) at the end of the second quarter, with 14.37 million shares.

Lastly, Kinder Morgan Inc. (NYSE:KMI) had unusual insider buying activity at the end of the previous trading week. Dax A. Sanders, Vice President of Corporate Development for Kinder Morgan, purchased 1,000 shares of Class P common stock on Friday for $27.40 each, and currently owns a stake of 269,927 shares. Next up is Vice President and General Counsel David R. DeVeau, who acquired 11,000 shares through multiple transactions at prices in the range of $27.39-to-$27.40 and enlarged his holdings to 354,132 shares. Thomas A. Martin, President of the Natural Gas Pipelines Group for Kinder Morgan Inc. (NYSE:KMI), bought a 10,000-share block on Friday at a weighted average price of $27.24, and lifted his direct ownership stake to 985,069 shares. Last but not least, President and Chief Executive Officer Steven J. Kean acquired 18,150 shares at prices between $27.41 and $27.44 apiece, and currently holds a 7.31 million-share stake. The shares of the third-largest energy company in the U.S have plummeted by 37% since the beginning of the year, so it is highly likely that these insiders purchased shares believing that they will appreciate in the months ahead. James Dondero’s Highland Capital Management owned a 2.14 million-share position in Kinder Morgan Inc. (NYSE:KMI) at the end of the June quarter.

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