Hedge fund managers and other stock market participants seem to be divided into two camps when it comes to how undervalued or overvalued they believe the U.S equity markets are at the moment. The cheap money mode pursued by the Federal Reserve is likely to be stopped in the near future, but it might take quite a while until alternative asset classes will become more attractive relative to equities. There is a wide array of factors that can affect the U.S economy and the underlying strength and potential of U.S-listed companies, so it is nearly impossible to predict where the market is heading from here. However, one can turn his or her attention to insider trading activity in order to find potential investment opportunities. Corporate insiders may sell stock for numerous reasons that are not related to their companies’ prospects, but they buy shares for one major reason: they believe the market underrates the potential and value of their companies. That being said, the following article will disclose the insider buying witnessed 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.
City Office REIT Inc. (NYSE:CIO) is one of the three companies that has seen strong insider buying activity lately. Director Samuel Belzberg purchased a 55,000-share block on Monday at a price of $11.10 per share, raising his stake to 138,751 shares. The equity real estate investment trust (REIT) owns 14 properties as of September 30, which contain a total of 28 office buildings. The REIT’s business primarily involves owning and acquiring office properties and them leasing the space to tenants. City Office REIT Inc. (NYSE:CIO) primarily targets markets that are anticipated to experience favorable economic growth and growing populations, so its financial performance mainly depends on management’s ability to accurately predict which markets to invest in and improve the occupancy rates of the leased space in those markets. As of September 30, the REIT had leased roughly 95% of its properties. Meanwhile, shares of City Office REIT are down by almost 10% since the beginning of the year, so the Director might have bet on stock price appreciation in the upcoming months while benefiting from the company’s quarterly cash dividend of $0.235 per share. Five hedge funds monitored by Insider Monkey were invested in the REIT at the end of the third quarter and had stockpiled 4.80% of its outstanding common stock as of that time. Renaissance Technologies owns a mere 71,849 shares of City Office REIT Inc. (NYSE:CIO) as of September 30.