Past research concludes that the insider trading anomaly is more prevalent in small-cap companies, which means that executives and directors at small firms tend to trade more profitably than insiders at large firms. Hence, scholars imply that individual investors need to focus their attention on insider transactions at small and mid-cap companies rather than large-cap firm, even though trading small-caps might be quite risky at times. Individual investors should take into account the liquidity when trading small-cap stocks, as the bid-ask spread associated with these stocks might be too significant on some occasions. Although the insider trading anomaly is not only limited to small and risky stocks, the following article will discuss the insider buying witnessed at three small-cap companies. Two of these companies have price tags below $5, and there seems to be enough liquidity to trade these stocks successfully.
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 imitating the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012 (read more details here).
Let’s begin our discussion with State Auto Financial Corp (NASDAQ:STFC), which saw two different executives purchase shares last week. To start with, Chief Executive Officer and President, Michael E. LaRocco, snapped up 8,181 shares on Friday at $21.23 apiece and lifted his overall holding to 17,232 shares. Moreover, Senior Vice President Kim Burton Garland purchased 1,156 shares on the same day at a price of $20.92 per share and currently owns 5,562 shares.
The regional property and casualty insurance holding company has witnessed its shares decline by 11% over the past 12 months, despite having gained 3% since the beginning of 2016. Nonetheless, the company’s current price is slightly below its book value of $21.40 as of December 31. State Auto Financial Corp (NASDAQ:STFC)’s net premiums written totaled $1.27 billion in 2015, up from $1.19 billion reported for the previous year. However, the company’s management was disappointed with its poor results in the fourth quarter of 2015, which were primarily caused by its auto lines. Even so, the company’s excess and surplus (E&S) casualty, and farm and ranch products were profitable and registered growth in the final quarter of 2015. It is important to mention that the company has been working on improving its pricing models and segmentation across product lines, which should inject much-needed dynamism into the company’s growth trajectory. State Auto Financial is also developing products in connection with emerging opportunities such as telematics, driverless vehicles and ‘smart’ homes. The stock trades at a forward P/E of 12.77, which is slightly above the average of 12.20 for the Property and Casualty Insurance industry. The number of hedge funds tracked by Insider Monkey with stakes in the company climbed to six from four during the December quarter. Royce & Associates, founded by Chuck Royce, owns 415,067 shares of State Auto Financial Corp (NASDAQ:STFC) as of December 30.
The next pages of this insider trading article discusses two low-priced stocks favored by insiders.