One metric commonly used to examine investing ideas is insider buying. Executives, directors, and employees of companies usually have a better understanding of their company’s current developments and future prospects, which serves as the most straightforward explanation as for why insider purchases tend to outperform broader market benchmarks. Corporate insiders have up-to-date insights about upcoming products, ongoing marketing campaigns, and supply/demand trends, so these individuals have much more reliable and useful data than analysts. It is believed that insider buying at small companies is especially informative given that those companies generally have a limited amount of research coverage on them. This feature creates great buying opportunities for corporate insiders, as well as non-insiders tracking insider trading activity. With that in mind, the following article will discuss the insider trading activity witnessed at three small-cap companies.
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).
Let’s begin our discussion with Harris & Harris Group Inc. (NASDAQ:TINY), which saw its entire Board of Directors, save for the Executive Chairman, purchase shares in March. According to a Form 4 filing submitted with the SEC on Monday, Director W. Dillaway Ayres Jr. bought 3,358 shares on March 18 for $1.91 per share, boosting his overall holding to 62,446 shares. Moreover, Director Stacy R. Brandom snapped up 3,515 shares on the same day for $1.91 each, which lifted her stake to 24,199 shares. Charles E. Ramsey, a member of the company’s Board of Directors since 2002, purchased 3,200 shares at $1.91 apiece a little more than two weeks ago, increasing his ownership to 98,302 shares. 4,666 shares were acquired by Lead Independent Director Richard P. Shanley, who currently owns 77,229 shares. Last but not least, Director Phillip A. Bauman bought 2,861 units of common stock on March 18 at a price of $1.91 per share, increasing his holding to 78,839 units.
Harris & Harris Group Inc. (NASDAQ:TINY) is a publicly-traded venture capital firm that operates as a business development company (BDC). The BDC primarily focuses on BIOLOGY+ companies, which represent interdisciplinary life sciences companies where biology innovation is interconnecting with innovations in various areas such as electronics, physics, materials science, and chemistry, to name just a few. Harris & Harris Group believes that the return potential of its portfolio primarily relies on the following non-precision health and precision medicine companies: D-Wave Systems Inc., a leader in the development, fabrication, and integration of superconducting quantum computers; HZO Inc., which designs technology solutions that make electronics waterproof and resistant to corrosion; and AgBiome LLC, a biotechnology company that uses new knowledge of the plant-associated microbiome to create innovative products for agriculture. 20 of the 26 companies included in the BDC’s portfolio generate revenue from commercial sales of products and services, commercial partnerships or government grants. The companies’ aggregate revenue for 2015 totaled $238.7 million, down from $264.7 million reported for 2014.
Harris & Harris Group’s share price of $1.66 is significantly below its net asset value per share of $2.88 as of the end of December, which might have triggered the wave of insider buying. Shares of Harris & Harris Group are down by 48% in the past 12 months. There were a mere four hedge funds in our system with stakes in the BDC on December 31, with them having amassed nearly 12% of its outstanding shares. John W. Rogers’ Ariel Investments owns 3.51 million shares of Harris & Harris Group Inc. (NASDAQ:TINY) as of the end of 2015.