Insider Buying Metric Points to Approaching Turnaround at These 3 Companies

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.

Let’s head to the next page of this daily insider trading article, which discloses the insider purchases witnessed at PHI Inc. (NASDAQ:PHIIK) and MGM Resorts International (NYSE:MGM).

PHI Inc. (NASDAQ:PHIIK) had one of its top executives purchase shares during the final two trading sessions of last week. President and Chief Operating Officer Lance F. Bospflug bought 20,000 shares at a weighted average cost of $20.35. After the recent transactions, the President and COO currently holds an ownership stake of 105,337 shares. PHI primarily operates as a provider of helicopter services to the oil and gas industry, and medical industry. Thus, the decreased level of offshore oil and gas exploration and production activities reduced the demand for the company’s offshore flight services this year, while the flight volume in its Air Medical segment was not enough to offset the struggling oil and gas segment. Even more to that, PHI anticipates that its revenue and profits from the Air Medical segment will be lower than last year in the fourth quarter. Meanwhile, total flight hours for the third quarter totaled 36,296, down from 40,936 reported for the third quarter of 2014. The decrease in flight hours in the oil and gas segment accounted for the entirety of the overall decline and then some, falling by 5,587 hours year-over-year. Shares of PHI are down by more than 50% for the year. Greg Boland’s West Face Capital cut its position in PHI Inc. (NASDAQ:PHIIK) by 3% during the July-to-September period, ending the quarter with 4.28 million shares.

Lastly, we will examine the insider buying activity at MGM Resorts International (NYSE:MGM). Director Gregory M. Spierkel reported buying a new stake of 5,000 shares on Friday at prices in the range of $22.45-to-$22.55 per share. The Director also owns 15,381 Deferred Stock Units, each one of which is the economic equivalent of one share of common stock and is payable upon the Director’s termination of service. The shares of the owner and operator of casino resorts are up by 4% this year despite facing a challenging business environment in the Macau market. Macau’s total gaming revenue in November totaled $2.06 billion, which marked a decrease of 21.2% year-over-year. MGM’s net revenue generated in the Macau market during the nine-month period that ended September 30 was $1.72 billion, down by 33% relative to the same period of last year. On the other hand, the company’s net revenue generated from its wholly-owned domestic resorts increased to $4.92 billion from $4.79 billion. The number of hedge funds from our database with stakes in MGM decreased to 49 from 58 during the September quarter, whereas the value of these stakes grew to $1.91 billion from $1.74 billion quarter-over-quarter. Daniel S. Och’s OZ Management is the largest equity holder of MGM Resorts International (NYSE:MGM) within our database, holding 15.84 million shares as of September 30.

Disclosure: None