The insider buying activity in the past several weeks has been muted ahead of the first-quarter earnings season. However, aluminum producer Alcoa Inc. (NYSE:AA), whose earnings reports kick off each earnings season, witnessed insider buying earlier this week, which implies that quarterly trading blackout periods for insiders imposed by most companies are being gradually lifted. Therefore, one could anticipate insider buying activity to gain steam in the upcoming weeks. But why would anyone even pay attention to insider buying? Well, officers and directors mostly buy shares of their companies for one simple reason: they can be almost certain that those shares will appreciate over time. In addition, past research shows that non-insiders can earn abnormal returns by following insider buying activity, so it does pay off to track insider buying indeed. Having said that, the following article will reveal and discuss several insider purchases observed at three companies, including the aforementioned aluminum producer.
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).
Alcoa’s Insider Buy Shares Ahead of Separation
Alcoa Inc. (NYSE:AA) had two members of its Board of Directors purchase shares this week. To start with, Director Ratan N. Tata purchased 2,150 shares on Wednesday for $10.37 each, boosting his overall holding to 60,501 shares. Martin Sorrell, another Board member, snapped up 2,100 shares on the same day at $10.36 apiece, which lifted his ownership to 34,156 shares.
The shares of Alcoa have gained 7% since the beginning of 2016, but they are still down by 21% in the past 12 months. In September 2015, the company’s Board approved a plan to separate Alcoa into two independent, publicly-traded companies. One company will operate the Alumina and Primary Metals segments, while the other one, to be called Arconic, will include Alcoa’s Global Rolled Products (GRP), Engineered Products and Solutions (EPS), and Transportation and Construction Solutions (TCS) segments. These business segments generated combined revenue of $3.3 billion in the first quarter of this year. While shareholders such as Paul Singer’s Elliott Associates voiced their support for the aforementioned spin-off, analysts at JPMorgan believe that the Arconic breakup will not “create significant additional value unless Alcoa is able to merge its upstream business with a similar-size upstream producer”. Meanwhile, analysts at Credit Suisse believe Alcoa could support a valuation of $14 to $15 per share based on a sum-of-the-parts calculation.
There were 41 hedge funds tracked by Insider Monkey with stakes in Alcoa at the end of 2015, which aggregately hoarded up nearly 15% of the company’s shares. Beech Hill Partners, run by Paul Cantor, Joseph Weiss, and Will Wurm, owns 61,215 shares of Alcoa Inc. (NYSE:AA) as of March 31.