Heavy Insider Buying And What It Might Signal For These Stocks

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According to the National Bureau of Statistics, China registered higher-than-expected economic growth in the third quarter, which still marked its lowest quarterly growth since the global financial crisis. The gross domestic product of the world’s second-largest economy grew by 6.9% year-over-year in the latest quarter, outpacing analysts’ expectations of 6.8%. However, it remains to be seen how the U.S equity markets will react to the freshly-announced data. In the meantime, the Dow Jones Industrial Average posted gains in three out of five trading sessions last week, which might have propelled some corporate insiders to acquire more stock of their companies. The Insider Monkey team identified three companies that saw their insiders buy stock last week, which could point to the fact that they either regained confidence in the U.S equity market or see great prospects at their companies. Thus, the following article will discuss the insider trades at these companies and will attempt to pinpoint potential explanations as to why those insiders were bullish on their companies.

Insider Trading Eyeglasses

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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 more than 102% over the ensuing three-plus years, outperforming the S&P 500 Index by more than 53 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.

Alcoa Inc. (NYSE:AA), a leader in lightweight metals technology, engineering, and manufacturing, saw two of its Directors buy stock last week. Director Ratan N. Tata acquired 4,555 shares on Friday at a price of $9.50 per share. Following the transaction, the Director now holds a stake of 55,689 shares. Similarly, Martin Sorrell purchased 4,435 shares on the same day for $9.49 each, enlarging his stake to 29,389 shares. These purchases came after Alcoa Inc. (NYSE:AA) released its disappointing third quarter earnings report on October 8. The company posted revenue of $5.6 billion, which was down by roughly 11% year-over-year. At the same time, Alcoa’s net income came in at $44 million, compared with $149 million a year ago. However, the company reiterated its forecast for global aluminum demand, which is expected to increase by 6.5% in 2015 and to double from 2010’s output by 2020. Let’s not forget to mention that the stock is down by nearly 40% year-to-date. George Soros’ Soros Fund Management acquired a 5.34 million-share stake in Alcoa Inc. (NYSE:AA) during the second quarter.

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The next page of the article will reveal the other two companies that had strong insider buying activity.

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