Heavy Insider Buying Witnessed at Twitter Inc. (TWTR) and Two Battered BDCs

The most promising three-day winning streak since August 2015 ended on Thursday, partly owing to a selloff in retail shares and a small weakness in crude oil prices. Last week’s insider buying activity was extremely high, which was not at all surprising given the awful start to 2016 that U.S equities have endured. Generally, insider trading behavior is considered a key tool of fundamental securities analysis, as it indicates how corporate insiders feel about their own companies. Past research provides evidence that insider trading behavior represents a fairly strong predictor of future stock performance, especially when it comes to insider buying. Corporate insiders usually have a tendency to go against the crowd, a habit that has proven to be very profitable over the years. As a general rule, insiders are risking their own capital and diversification for one simple reason: they believe their companies’ stock is greatly undervalued by the market. That being said, the following article will discuss several noteworthy insider purchases registered at three struggling 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 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 Prospect Capital Corporation (NASDAQ:PSEC), which has seen ballooning insider buying activity over the past several weeks and months. To start with, Chief Executive Officer John F. Barry snapped up nearly 1.12 million shares on Tuesday and 1.06 million shares last Friday at prices that ranged from $6.14 to $6.36 per share, boosting his overall holding to 16.46 million shares. Furthermore, Chief Operating Officer Michael Grier Eliasek purchased 15,000 shares on Tuesday and 30,000 shares last week at prices ranging from $5.69 to $6.30 per share. After the recent sizable purchases, the COO currently owns a stake of 672,196 shares.

Business development companies (BDCs) have performed particularly poorly in terms of stock performance over the past several quarters and Prospect Capital Corporation (NASDAQ:PSEC) is no exception; the shares of the financial services company are down by 22% over the past 12 months. However, the stock has been on a surge since February 9 following the company’s better-than-expected financial results for the second quarter of fiscal year 2016 that ended December 31. The company’s net investment income (NII) for the quarter totaled $100.9 million, increasing by $9.7 million quarter-over-quarter. Prospect Capital’s net asset value (NAV) per share dropped by only 5.11% quarter-over-quarter to $9.65 on December 31, which means that the stock trades at a huge discount to the value of its portfolio. Just recently, analysts at FBR & Co. reiterated their ‘Outperform’ rating on the stock, with a price target of $9.00, citing its attractive dividend yield among other things. The BDC pays out a monthly cash dividend of $0.08333 per share, which generates a current dividend yield of 15.17%. Nathaniel August’s Mangrove Partners reported owning 753,321 shares of Prospect Capital Corporation (NASDAQ:PSEC) through its 13F for the fourth quarter of 2015.

The next page of this insider trading article discusses the insider buying activity witnessed at New Mountain Finance Corp. (NYSE:NMFC) and Twitter Inc. (NYSE:TWTR).

New Mountain Finance Corp. (NYSE:NMFC) saw one member of its Board of Directors buy a sizable block of shares this week. Director Steven B. Klinsky, also the founder of New Mountain Finance, bought 84,780 shares on Tuesday and 200,000 shares on Wednesday, at a weighted average price of $11.93 and currently owns 4.53 million shares. The Director holds an additional indirect ownership stake of 893,413 shares held through two separate trust funds. The shares of the BDC are down by 19% over the past year, after having dipped by nearly 7% year-to-date.

At the end of January, the BDC announced preliminary fourth quarter estimates ahead of its fourth quarter earnings release on February 29. The company said that it anticipates adjusted net investment income (NII) per share in the range of $0.33 to $0.35 for the quarter, which falls within its previously announced guidance. It is important to note that the energy sector comprises only 6.48% of the company’s total investments as of September 30, and the company does not anticipate any new underperforming assets. New Mountain Finance also disclosed that its net asset value (NAV) per share as of December 31 would most likely be in the range of $12.90 to $13.15, down from the figure of $13.73 per share registered at the end of September. The stock is currently trading at a visible discount to the NAV indicator, which probably explains the recent insider buying activity. Ken Griffin’s Citadel Advisors LLC owns 144,979 shares of New Mountain Finance Corp. (NYSE:NMFC) as of December 31.

Let’s wrap up our discussion with Twitter Inc. (NYSE:TWTR), which had two top executives buy sizable blocks of shares this week. Executive Chairman Omid Kordestani acquired 122,250 shares on Tuesday at prices that fell between $16.25 and $16.40 per share, lifting his overall holding to 522,250 shares. Moreover, Chief Financial Officer Anthony Noto snapped up 15,500 units of common stock on the same day, at a weighted average cost of $16.08, enlarging his stake to 1.26 million shares.

The shares of Twitter have been under pressure over the past year or so, as stock market participants have soured on the company’s ability to keep growing its user base. In fact, investors’ main concerns around Twitter include its fast-expanding losses, relatively small user-base in comparison to other social media platforms, and its slowing user growth. The company’s average active users (MAUs) in the fourth quarter of 2015 increased by 9% year-over-year, but was flat quarter-over-quarter. Many investors tend to believe that Twitter is somewhat locked in a death spiral, but one should not forget that Twitter is still among the world’s most popular social media platforms. There is a camp of analysts who believe that Twitter can capitalize on its mobile application Vine, which allows users to create and distribute videos that can last up to six seconds. Of course, Vine will not generate revenue in-line with YouTube, but there is great opportunity for Twitter on this front. D.E. Shaw & Co. L.P., founded by David E. Shaw, cut its stake in Twitter Inc. (NYSE:TWTR) by 434,330 shares during the December quarter, to 645,514 shares.

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