Our research on insider trading patterns has concluded that stocks bought by insiders tend to outperform the market following these purchases, particularly if multiple insiders are buying (read our analysis of studies on consensus insider purchases). We’re also big believers that small cap stocks are more likely to be mispriced than larger companies which receive constant attention from the financial media and from large institutional investors such as mutual funds. As a result, we like to treat multiple insider purchases similarly to a stock screen- as a signal that a company may be worth taking at least a brief look at to decide whether or not it might be undervalued and therefore worthy of further analysis. Here are five stocks with market capitalizations between $1 billion and $5 billion which multiple insiders have bought recently:
Multiple insiders were buying shares of real estate developer Howard Hughes Corp (NYSE:HHC), signaling that they believe that real estate markets will continue to recover. Last quarter Howard Hughes Corp (NYSE:HHC) delivered over a 60% increase in revenue compared to the second quarter of 2012, roughly matching the rate at which the stock price has risen in the last year; operating income has surged as well. Wall Street analysts expect $3.37 in earnings per share in 2014, making for a forward earnings multiple of 31.
In addition to insider trading activity, we also track quarterly 13F filings from hedge funds and other notable investors. We’ve found that, on average, the most popular small cap stocks among hedge funds achieve an average excess return of 18 percentage points per year; putting this theory into practice, last summer we launched a small cap portfolio following this strategy which has since outperformed the S&P 500 by 33 percentage points. Learn more about our small cap strategy. We can also use our database to track hedge fund interest in individual stocks. For example, billionaire Bill Ackman’s Pershing Square owned 3.6 million shares of Howard Hughes Corp (NYSE:HHC) last quarter (see Ackman’s stock picks).
Oil and gas exploration and production company Halcon Resources Corp (NYSE:HK), focused on shale fields in the onshore U.S., is down 41% in the last year and still has 17% of its float held short. A number of insiders have reacted to this bearishness by buying the stock. Production has been up in percentage terms, but Halcon Resources Corp (NYSE:HK), is still depending on further increases in order to hit sell-side targets for next year. If the company does meet analyst forecasts, then the forward P/E would be only 15 and so we’d be interested in following further results from the company.