The wild swings in the U.S equities markets are creating bountiful trading opportunities for intraday traders, but this volatility isn’t good for most market participants, including the hedge funds monitored by Insider Monkey. The Dow Jones Industrial Average is over 230 points in the red so far in today’s trading session, after recording a gain of slightly over 104 points on Monday. Leaving the uncertainty around the timing of the Fed’s rate hike and worries about China’s economic slowdown aside, some corporate insiders have been piling up their companies’ stock recently. It is no surprise that the insider buying activity is generally taken as a bullish sign, as it is hard to believe that there is someone in the market investing money without expecting a return. The Insider Monkey team identified three companies that had an increased flow of insider buying activity recently, and we will attempt to lay out potential reasons behind this activity. The companies in question are LivePerson Inc. (NASDAQ:LPSN), Triangle Petroleum Corporation (NYSEMKT:TPLM), and Aeropostale Inc (NYSE:ARO).
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 start our discussion by looking at the insider buying activity at LivePerson Inc. (NASDAQ:LPSN). The company’s director Wesemann G. William reported buying 10,000 shares at an exact price of $8.018 per share, enlarging his holding to 90,000 shares. In addition to this holding, the director also indirectly owns 20,000 shares through a family trust called Wasemann Family Trust – 2000. The provider of live digital engagement solutions has been struggling to lure investors this year, with its shares dropping by over 41% since the beginning of the year. The stock has not been trading at such low levels since 2010, so it appears that the director is buying on the belief that he is purchasing undervalued securities. Just a few days ago, the company announced the launch of two data centres in Australia, a decision that was driven by high regional demand for cloud services. Robert G. Moses’ RGM Capital reported the acquisition of a new stake of 2.01 million shares of LivePerson Inc. (NASDAQ:LPSN) in its 13F filing for the June quarter.