Extensive research has provided evidence that insiders’ purchases tend to greatly outperform the broader market on aggregate, while mimicking their moves can also generate substantial profits. The logic behind tracking insider buying activity is quite straightforward, as it would be ridiculous to assume that insiders invest their hard-earned capital without expecting a return on their investments. However, piggybacking every insider move does not entirely make sense, as these knowledgeable individuals can make wrong choices on some occasions and may be short-minded when it comes to investing in their companies’ stock. For that reason, savvy and educated investors would generally closely examine each insider buy at a company prior to buying shares of that company right away. Investigating insider buying activity should serve more as a tool of an investor’s stock selection process rather than a trading strategy. The Insider Monkey team identified three companies with insider buying activity this week, and this article will discuss some firm-specific developments that might have guided investors to buy shares.
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 begin our investigation of the insider buying activity at those three companies with Time Inc. (NYSE:TIME). Director David Arthur Bell snapped up 2,400 shares on Wednesday at a price of $16.88 per share and currently owns 10,770 shares. The shares of the media company are 32% in the red this year, as the company’s management has been trying to alleviate the decrease in its print advertising and circulation revenues. At the end of November, the company announced the completion of its previously-revealed sale of the Blue Fin Building in London for approximately $636 million. Time is set to use most of these proceeds to fund stock repurchases, strengthen its balance sheet by reducing long-term debt and fund growth initiates, including acquisitions and other capital investments. The company generates most of its revenues from the sale of advertising in its magazines and websites, in addition to subscriptions and newsstand sales. But Time has been struggling to deliver revenue growth lately, as its third-quarter revenue declined to $773 million from $821 million reported a year ago. The number of hedge funds from our database with stakes in the company decreased to 18 from 25 during the September quarter. Cliff Asness’ AQR Capital Management upped its stake in Time Inc. (NYSE:TIME) by 48% during the June-to-September period, ending the quarter with 875,722 shares.