Although much research shows that security purchases on the part of corporate insiders tend to beat broader market benchmarks, Insider Monkey does not recommend blindly mimicking each insider purchase. Nevertheless, insider trading behavior can serve as an important add-on tool in one’s securities analysis process and can be used to support a larger investment thesis. Just like well-known short-seller Jim Chanos uses executive departures to reinforce his bearish theses on certain companies, heavy insider buying can be used to reinforce a larger bullish investment thesis as well.
Furthermore, retail investors can also screen insider buying, particularly clusters of buying, as a stock selection procedure. Battered companies witnessing noteworthy insider buying may represent strong investment candidates that require further research. Meanwhile, there are dozens if not hundreds of reasons corporate insiders may want to sell shares of their companies. For instance, an insider might want to diversify his or her holdings, purchase a new house, or take an expensive vacation. Nonetheless, as corporate insiders usually follow the pattern of “buying low and selling high”, there is good reason to believe that most insiders sell shares when they believe their company’s valuation is approaching or exceeding a “true” or “correct” value. That said, let’s have a look at several noteworthy insider transactions reported with the SEC earlier this week.
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 imitating 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).
Two Insiders of Fiber-Optic Networking Equipment Vendor Pile Up Shares
Infinera Corp. (NASDAQ:INFN) had two different insiders purchase shares earlier this week. To begin with, John P. Daane, a Member of the company’s Board of Directors since January, acquired a new stake of 12,000 shares on Monday for $8.49 each. More importantly, Chief Executive Officer Thomas J. Fallon snapped up 100,000 shares on the same day at prices varying from $8.48 to $8.57 per share, lifting his ownership to 1.11 million shares.
The maker of optical transport networking equipment, software and services has lost 52% of its market value since the beginning of the year. The shares of Infinera took a hit after the company warned of “concerning signs of slowing demand in the primary markets” that it serves alongside with its second quarter results, which topped analysts’ estimates. Just recently, analysts at Needham & Co. cut their price target on the company to $15 from $20 but reiterated their ‘Strong Buy’ rating on it, saying that “we are going to hold our nose and ride out the trip to the sewers; we think much of this is temporary.” Concourse Capital Management, run by Joseph Mathias, upped its position in Infinera Corp. (NASDAQ:INFN) by 89% during the June quarter, to 65,049 shares.
The second page of this article will disclose two companies with fresh insider buying, while the third page of the article will discuss the insider selling at two other companies.