The Standard and Poor’s 500 Index has lost more than 9% thus far in 2016, while correlations among stocks was very high in January. Correlation is an indicator of how stocks or sectors move up and down at the same time, so high correlations usually suggest that both good and bad stocks get punished by the market all together. The average correlations for the S&P 500’s ten sectors reached 86.9% in January, so it is highly likely that some high-potential stocks are trading at very cheap prices at the moment. But how can individual investors identify beaten-down stocks trading at very attractive valuations? One way to find attractive stocks poised to generate desired trading profits is to track insider buying activity. Much research provides evidence that corporate insiders, especially top executives, make very well-timed trades, thanks to their strong knowledge about their companies’ businesses and industries. For that reason, the following article will discuss the recent insider buying observed at three companies.
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 (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.
Beazer Homes USA Inc. (NYSE:BZH) saw eight different insiders buy sizable blocks of shares earlier this week, which is the kind of insider trading activity individual investors should pay close attention to. So let’s take a look at the most noteworthy purchases and attempt to find out what might have prompted insiders’ bullishness. To start with, Executive Vice President and Chief Financial Officer Robert L. Salomon purchased 6,500 shares on Friday and 3,000 shares on Monday at prices ranging from $6.08 to $7.23 per share, lifting his total stake to 155,736 shares. Non-Executive Chairman Stephen P. Zelnak has acquired 45,000 shares since Friday at prices that ranged from $6.23 to $7.24 per share and currently owns 136,920 shares. Director Larry T. Solari bought 10,000 shares on Monday at a cost of $6.62 per share, all of which are held by a trust fund. The trust owns 32,971 shares after the recent purchase, while the Director holds an additional direct ownership stake of 7,128 shares. Most importantly, Chief Executive Officer and President Allan P. Merrill snapped up 7,500 shares on Friday and 2,500 shares on Monday at prices varying from $6.25 to $7.25 per share, boosting his overall holding to 451,675 shares.
The diversified homebuilder saw its shares plummet a day after the stock closed in the green on the back of a stronger-than-expected earnings report, and it is not entirely clear what triggered the significant sell-off. Beazer Homes USA Inc. (NYSE:BZH)’s shares are down by 61% over the past 12 months, after having plunged by 43% in 2016. The beaten-down homebuilder reported total revenue of $344.45 million for the first quarter of fiscal year 2016 that ended December 31, up from $265.76 million reported for the same period of fiscal year 2015. Most importantly, the company generated total operating income of $9.15 million, compared to an operating loss of $9.49 million reported for the same period of the prior year. It is also worth mentioning that the stock trades at a very cheap forward P/E multiple of 3.44, well beneath the ratio of 10.80 for the homebuilding industry. Royce & Associates, founded by Chuck Royce, upped its stake in Beazer Homes USA Inc. (NYSE:BZH) by 111,500 shares during the fourth quarter, ending the three-month period with 806,075 shares.