Heavy Insider Buying And What It Might Signal For These Stocks

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.

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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.

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

Let’s now take a look at the insider buying activity at global footwear company Caleres Inc. (NYSE:CAL) (formerly Brown Shoe Company). Director Lori H. Greeley acquired a new stake of 1,000 shares at a price of approximately $31.09 per share. Even though the purchase is not overly substantial, this trade is worth mentioning given that it represents the first insider purchase over the past year or so at the company. Caleres Inc. (NYSE:CAL)’s financial performance improved during the second quarter, thanks to the company’s investments in its long-term strategic growth initiatives. The footwear company also restructured some of its debt during that quarter, which resulted in the reduction of its interest rate to 6.25% from 7.125%. It is also worth pointing out that the company has been focused on driving margin expansion and strengthening its balance sheet, which unquestionably serve as two long-term drivers of growth. Balyasny Asset Management, founded by Dmitry Balyasny, owns nearly 523,000 shares of Caleres Inc. (NYSE:CAL) as of June 30.

Last but not least, newly-public company CytomX Therapeutics Inc. (NASDAQ:CTMX) had three different insiders acquire stock through its initial public offering last week. W. Michael Kavanaugh, who serves as Chief Scientific Officer and Head of Research and Early Development at CytomX, acquired a 5,000-share stake at the IPO price of $12.00 per share. Cynthia J. Ladd, Senior Vice President and General Counsel, also purchased a new stake of 3,000 shares at the same price. Lastly, Frederick W. Gluck reported the acquisition of 15,000 shares, 5,000 shares of which were acquired by Richlin Partners LLC, an entity owned by his spouse. After the recent transaction, the Director holds a direct ownership stake of 147,791 shares. On October 14, the biopharmaceutical company, which is developing Probody therapeutics for the treatment of cancer, raised approximately $80 million in capital through its IPO of 7.67 million shares. There is no doubt that the insider acquisitions related to IPOs do not bear overly strong signals for investors; however, the aforementioned purchases show the confidence of CytomX Therapeutics Inc. (NASDAQ:CTMX)’s executives and directors in the potential of its product. At this point in time, the shares of CytomX Therapeutics Inc. (NASDAQ:CTMX) are trading 5.50% above the price of their IPO offering.

Disclosure: None