Expectedly, most shareholders of a company would want to see insider buying activity, as it usually shows insiders’ confidence in the company and its future prospects. As a general rule, insider buying is perceived as a bullish signal by the market and represents a sign of stock price appreciation in the forthcoming future. Extensive research shows that insider purchases tend to beat the broader market quite consistently over the years, so individual investors can capitalize on insiders’ ability to buy and sell stock at the right time. Insider trading behavior may be useful for ‘insider trading anomaly’ skeptics as well, as it can represent a tiny part of a broader stock selection and analysis process. Having said that, this article focuses on the insider buying activity witnessed at three companies and the recent performance of these companies.
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 102% over the ensuing 38 months, outperforming the S&P 500 Index by more than 53 percentage points (read more 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.
Let’s kick off our discussion on insider trading behavior by looking into Devon Energy Corp (NYSE:DVN). Director John E. Bethancourt bought 10,000 shares on Friday at prices that ranged from $28.61 to $29.21 per share, lifting his overall holding to 27,770 shares. The shares of this independent energy company are down 51% so far in 2015, but some analysts believe that this company is well-positioned to endure the ongoing challenging environment and achieve a strong rebound should commodity prices settle higher. Devon Energy Corp (NYSE:DVN)’s strong balance sheet, good asset quality and attractive valuation will enable the company to outperform its peers when crude oil and natural gas prices rebound. In the meantime, roughly half of the company’s 2015 oil and gas production has been hedged at approximately $90 per barrel and $4 per Mcf, correspondingly. Earlier this month, Devon Energy announced the acquisition of 80,000 net surface acres in the Anadarko Basin STACK play for $1.9 billion and 253,000 net acres in the Powder River Basin for $600 million. These moves are aimed at strengthening the onshore producer’s “position in two of the best emerging North America development oil plays”. Israel Englander’s Millennium Management reported owning 5.85 million shares in Devon Energy Corp (NYSE:DVN) through its 13F for the third quarter.