Insider Buying Metric Points to Three Small-Cap Stocks Poised to Explode; Is Insider Trading Anomaly More Prominent Among Small-Caps?

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.

Pioneer Energy Services Corp (NYSE:PES) had its most influential insider purchase a sizable block of shares last week. Chief Executive Officer and President, William Stacy Locke, bought 85,000 shares on Friday at a price of $1.19 per share and boosted his direct ownership stake to 753,663 shares. The CEO also holds an indirect ownership stake of 180,334 shares through Locke Children’s Trust.

The shares of the provider of land-based drilling services and production services to the oil and gas industry in the U.S. and Colombia are down by 77% over the past 12 months. Of course, all rig classes have suffered from the depressed oil prices environment, but AC drilling rigs, which are suited for horizontal pad drilling, are among most desirable rigs in the industry. Pioneer Energy Services built five AC drilling rigs during 2015 and sold 32 of its mechanical and lower horsepower electric drilling rigs. At of the end of 2015, 14 of the company’s 23 domestic drilling rigs were generating revenues, most of which were under term contracts. Pioneer Energy Services Corp (NYSE:PES) undertook major steps last year to adapt to challenging market conditions, which included total headcount reductions of 52%, wage rate cuts for operations personnel, incentive compensation reductions and employment benefits eliminations. The company’s revenue totaled $540.78 million in 2015, down from $1.06 billion reported for 2014.

Let’s now switch our focus on the health of the company’s balance sheet and its liquidity. Pioneer Energy Services has $395.00 million in debt as of December 31 and has to pay $23.25 million in interests within one year. At the same time, the company has cash and cash equivalents of $14.16 million as of the end of 2015, which decreased during the last year due to purchases of property and equipment and debt repayment of $60.0 million. However, the company has $300 million of principal amount outstanding under its Senior Notes and $95 million outstanding under its Revolving Credit Facility, so Pioneer Energy is well-positioned to endure the current challenging environment. A total of 11 hedge funds from our database were invested in the drilling services company at the end of December, accumulating 7.60% of its outstanding stock. Todd J. Kantor’s Encompass Capital Advisors added a 1.91 million-share position in Pioneer Energy Services Corp (NYSE:PES) to its equity portfolio during the December quarter.

Cincinnati Bell Inc. (NYSE:CBB) is another small-cap company that recently had two top executives pile up shares. To begin with, Chief Executive Officer and President, Theodore H. Torbeck, purchased 33,033 shares on Monday at a price of $3.05 per share, boosting his overall holding to 1.05 million shares. Furthermore, Chief Financial Officer, Leigh R. Fox, bought 3,212 shares on the same day for $3.07 each. After the recent purchase, the CFO currently holds a stake of 82,309 shares.

The stock of the regional provider of entertainment, data and voice communications services is 13% in the red year-to-date and has not traded above the $5 level since early 2013. The company had a strong 2015 in term of financial performance, as it experienced growth across its strategic products and successfully monetized a portion of its CyrusOne investment. In January 2013, Cincinnati Bell completed the initial public offering of CyrusOne, which currently operates the company’s former Data Center Collocation segment. In July 2015, Cincinnati sold 6.0 million operating partnership units for $28.41 apiece, which resulted in a third-quarter gain of $117.7 million. The company owns 11% of CyrusOne as of September 30. Meanwhile, Cincinnati Bell Inc. (NYSE:CBB)’s revenue for 2015 totaled $1.17 billion, which marked an increase of 1% year-on-year. Its management anticipates 2016 revenue of $1.2 billion. A total of 15 smart money investors among those we track held shares of Cincinnati Bell Inc. (NYSE:CBB) at the end of 2015, amassing 9.30% of the company. Jim Simons’ Renaissance Technologies reported owning 1.04 million shares of Cincinnati Bell Inc. (NYSE:CBB) in its latest 13F filing.

Disclosure: None