It is common knowledge that insider buying indicates insiders’ confidence in a company’s future prospects and performance. The legendary portfolio manager of mutual fund Fidelity Magellan, Peter Lynch, once claimed that “insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise”. Moreover, research has shown that insiders’ purchases tend to outperform the broader market benchmarks, and non-insiders can capitalize on that by following their moves. The Securities and Exchange Commission requires insiders to speedily disclose their trades, which enables investors to closely analyze up-to-date insider trading behavior that can be used as part of a broader stock-picking process. The Insider Monkey team pinpointed three companies that witnessed noteworthy insider purchases recently, so this article will disclose and analyze those trades.
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.
Union Pacific Corporation (NYSE:UNP) saw an insider purchase a sizable block of shares last week. Director Michael Robert McCarthy purchased 50,000 shares on Friday at a weighted average price of $78.06, lifting his overall stake to 54,589 shares. Railroads have always played a key role in the development of the U.S economy, but the depressed coal markets have put significant weight on Union Pacific and other railroad operators. Just recently, Bank of America Merrill Lynch downgraded Union Pacific Corporation (NYSE:UNP) to ‘Neutral’ from ‘Buy’ and cut its price target for the company’s shares to $87 from $102, citing significant coal exposure. The sluggish demand for coal is mainly attributable to the transition of utilities to other fuel sources, mainly due to lower natural gas prices, along with slowing global economic growth. Union Pacific’s freight revenue for the third quarter totaled $5.22 billion, down from $5.82 billion for the same period of last year. That figure declined as a result of volume declines in most of the company’s commodity groups, especially coal (coal freight revenue accounted for 17% of the company’s freight revenue in the third quarter). Nevertheless, the shares of the railroad operator are trading at a cheap trailing price-to-earnings ratio of 13.35, which is significantly below the ratio of 22.71 for companies in the S&P 500 Index. James Dinan’s York Capital Management initiated a 1.27 million-share position in Union Pacific Corporation (NYSE:UNP) during the third quarter.