There may be a lot of reasons corporate insiders sell shares of their company, but there appears to be only one straightforward reason for insiders to channel their hard-earned money towards buying their company’s stock in the open market. Stock market watchers need to pay close attention to insider buying activity, mostly because these highly-informed individuals have a better understanding of their company’s business and have a good feel about future industry conditions. Corporate insiders, especially top-tier executives, have up-to-date insights about upcoming marketing campaigns, industry conditions, possible future transactions, and other issues surrounding their company. Of course, insiders are restricted from trading on material non-public information, but it is almost impossible to restrict insiders from making well-timed and highly-informed purchases in equity markets. Corporate insiders are well aware of the harsh consequences of being involved in illegal insider trading, but they can have their own perception of how undervalued or overvalued their companies are and they can use that perception to trade equities. With that in mind, this article will discuss the insider buying activity registered at three publicly-traded 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 kick off our discussion by examining the insider buying activity witnessed at Holly Energy Partners L.P. (NYSE:HEP), which had its most influential executive purchase shares this week. Michael C. Jennings, Chief Executive Officer of Holly Logistic Services LLC, which the general partner of HEP Logistics Holdings LP (the general partner of Holly Energy Partners L.P.), purchased 12,851 shares on Tuesday and 2,149 shares on Wednesday at prices that ranged from $32.90 to $33.75 per share, boosting his holding to 29,948 shares. Holly Energy Partners is a limited partnership that owns and operates petroleum product and crude pipelines, terminal, tankage and loading rack facilities, and refinery processing units that deal with refining and marketing operations of HollyFrontier Corporation and Alon USA’s refinery. The company primarily derives revenues from tariffs associated with the transportation of petroleum products and crude oil through its pipelines, and from fees related to the storage of refined products and other hydrocarbons. Holly Energy Partners L.P. (NYSE:HEP) generated total revenue of $358.88 million in 2015, which increased from $332.55 million in 2014 and $305.18 million in 2013. The $26.3 million increase in 2015 was mainly driven by annual tariff increases, higher pipeline shipments, as well as additional revenue from several crude tanks and refinery processing units acquired last year. To be more detailed, the company’s pipeline volumes increased 21% year-on-year in 2015, mainly due to higher volumes from the expansion of the New Mexico gathering system. Net income increased to $148.33 million in 2015 from $113.81 million in 2014 and $86.08 million in 2013. Earlier this year, the company’s Board of Directors declared a cash distribution of $0.565 per unit for the final quarter of 2015 (equates to a current annualized yield of 6.68%), which increased 6.6% year-on-year. This increase marks the 45th consecutive quarterly distribution increase. A mere five hedge funds tracked by Insider Monkey had stakes in HEP at the end of December 2015. Jim Simons’ Renaissance Technologies acquired a new stake of 108,527 shares in Holly Energy Partners L.P. (NYSE:HEP) during the December quarter.
Ambac Financial Group Inc. (NASDAQ:AMBC) saw two different insiders make sizable acquisitions of stock in March. To start with, Chief Executive Officer Nader Tavakoli bought 20,000 units of common stock on Wednesday and 8,390 units on Thursday at a weighted average cost of $15.98 per unit, boosting his direct ownership stake to 163,287 shares. Freshly-appointed Director, David L. Herzog, acquired a new stake of 12,820 shares on Thursday through multiple transactions at prices ranging from $15.69 to $15.89 per share.
The New York City-based bond insurer has been facing mounting pressure from activist hedge funds lately, which have been trying to push the company to speed up the payment of approximately $4 billion in insurance claims in which some of those funds have an interest. Canyon Capital Advisors LLC, co-founded by Joshua Friedman and Mitchell Julis, is one of Ambac’s equity holders that has been calling on the company’s CEO to step down. Canyon Capital owns 2.01 million shares of Ambac as of December 31, but is said to have ten times more debt interest in the company. The activist investment firm has been urging the bond insurer to accelerate the settlement of several billion dollars of policy claims, but the company said that “Canyon has as its singular objective the accelerated payment of Canyon’s creditor claims, not the best interests of Ambac’s shareholders”. Meanwhile, William C. Martin’s Raging Capital Management LLC, which owns 2.4% of the company’s shares, voiced its support for Ambac’s current position and urged Canyon Capital to “terminate their unnecessary proxy contest” (Canyon recently nominated three independent candidates for election to Ambac’s Board of Directors). Shares of Ambac Financial Group have advanced 12% since the beginning of 2016, but they are down 37% in the past 12 months. The smart money sentiment towards the bond insurer declined significantly during the December quarter, as the number of funds with stakes in the company dropped to 16 from 27 quarter-on-quarter.
Violin Memory Inc. (NYSE:VMEM) registered a massive volume of insider buying in March. To begin with, Director Donald J. Listwin purchased 100,000 shares on Thursday at $0.52 apiece, all of which are held by the Don Listwin Trust that currently owns nearly 2.34 million shares. Mr. Listwin purchased an additional 286,000 shares in mid-March. More importantly, Chief Executive Officer and President Kevin DeNuccio snapped up 75,000 shares last Monday at a weighted average price of $0.50, which lifted his ownership to 348,054 shares.
Violin Memory is a developer and supplier of memory-based storage systems designed to line up storage performance with high-speed applications, serves and networks. Violin Memory’s shares have been on a freefall since the company went public in the fall of 2013, which might have forced the company to pursue strategic alternatives to create shareholder value. The company has been facing activist pressure from firms such as Clinton Group and Imation, which recently provided a notice of their intention to nominate three individuals to the company’s Board of Directors at the upcoming annual meeting of shareholders. The Clinton Group and Imation said earlier this year that Violin Memory should be sold to a strategic buyer before the upcoming shareholder meeting. The two shareholders “believe that the Company’s technology is exceptional and essential to a number of potential large strategic buyers who intend on competing in flash-based storage”. “Looking at valuation multiples of acquired companies in the flash storage space – SolidFire, Whiptail and Virident; and trading multiples of public comparable companies (Nimble Storage and Pure Storage)– multi-party demand in an auction process can yield a significant premium to Company’s stock price”, said one official of Clinton Group at the beginning of 2016. Shares of Violin Memory are down 86% in the past 12 months. A total number of eight hedge funds from our system had stakes in the struggling company, amassing 10.40% of its outstanding common stock. George Hall’s Clinton Group owns 2.17 million shares of Violin Memory Inc. (NYSE:VMEM) as of December 31.