Insider Buying In These Underperforming Stocks Suggests They are Out of Woods

The US equity markets closed in the red four days over the past five-day period since the Fed’s decision to keep interest rates unchanged. On Wednesday, the Dow Jones Industrial Average dropped 50.58 points or 0.31%, while volatility is not fading away. In fact, the VIX, a measure of expected 30-day stock market volatility, has been above 20 for 23 consecutive trading sessions, which marks its longest run since June 2012. Despite facing such a turbulent stock market environment, some corporate executives have been acquiring shares of their companies lately, which could somewhat suggest that the recent volatility has hit their companies too strongly (i.e. even though their fundamentals have not changed by much). The Insider Monkey team detected three companies that have seen an unusual insider buying activity, so we will make an attempt to find what might have caused the high wave of activity. The companies in question include Marathon Oil Corporation (NYSE:MRO), Box Inc (NYSE:BOX), and Mattress Firm Holding Corp (NASDAQ:MFRM).

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 118% over the ensuing 36 months, outperforming the S&P 500 Index by nearly 61 percentage points (read the details here).

Let’s begin by examining the insider purchases at Marathon Oil Corporation (NYSE:MRO), an energy company that has seen a terrible stock performance so far this year. Patrick Wagner, Vice President of Corporate Development at Marathon, reported acquiring 5,000 shares last week at a price of $15.40 apiece. Following the transaction, the executive owns 35,167 shares. The oil-price slump continues to hurt most companies in the energy sector and Marathon Oil Corporation is no exception, as its stock has lost more than 45% year-to-date, but it seems they are in a bottoming-out phase at the moment. Some oil analysts believe that oil prices will rebound in the years ahead, but it is highly unlikely that they will go far beyond the $100 level. Allegedly, the relationship between economic growth and oil demand has been declining, mainly owing to technology and environmental consciousness. Having said that, it might be the case that Patrick Wagner is betting on a turnaround of the energy sector and of his company in particular. William B. Gray’s Orbis Investment Management added a 3.82 million-share position to its portfolio during the second quarter.

Next in line is Box Inc (NYSE:BOX), a provider of cloud-based enterprise content collaboration platform that conducted its IPO at the beginning of the year. Director Josh Stein purchased a new stake of 20,000 shares earlier this week at prices in the range of $12.73 and $12.98 per unit, all of which are held by the Joshua and Jennifer Stein Revocable Trust. The director also owns 5,767 restricted stock units (RSUs), for each one of which he will receive one Class A share at vesting or settlement date. Box’s first post-IPO year has been quite disappointing, given that its shares have been on a steady downtrend since January. Box sold its shares at an IPO price of $14, which skyrocketed by 66% in its first trading session. However, they have lost over 45% since then, which might indicate that the director sees Box’s stock as undervalued at the moment. However, amid a decline of the stock, hedge funds are a bit cautious towards Box (see the ranking of cloud computing stocks among hedge funds). Ken Griffin’s Citadel Investment Group significantly boosted its stake in Box Inc (NYSE:BOX) during the second quarter to 474,180 shares, which serves as another bullish sign on the stock.

Finally, let’s see what Mattress Firm Holding Corp (NASDAQ:MFRM) has in store for us. Alexander S. Weiss, who has been Chief Financial Officer since July 2014, purchased 5,000 shares on Friday through two transactions at prices of $45.34 and $45.35 per share. After the last week’s transactions, the CFO currently holds a 40,629 share-stake. It is hard to overlook the recent plunge of Mattress’ shares on the chart, which was triggered by its second-quarter financial results. The company reported revenue of $661.1 million and earnings per share of $0.67, which were below expectations of $663.6 million in revenue and EPS of $0.72. It might be the case that the market overreacted to the weaker-than-expected financial results, and the CFO might be making a bet on a turnaround. Alan Fournier’s Pennant Capital Management is among the largest shareholders of Mattress Firm Holding Corp (NASDAQ:MFRM) within our database, owning 2.56 million shares as of June 30.

Disclosure: None