Every time individual investors come across heavy insider buying at certain companies, they should recall the following statement made by successful finance guru Peter Lynch: “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise”. Indeed, extensive research provides evidence that insiders’ purchases tend to beat broader market benchmarks on aggregate. This phenomenon can be explained either by insiders’ tendency to act as contrarian investors or by their first-hand knowledge of what their companies are doing, which allows them to time their purchases better than other investors. With that in mind, the following article will discuss the recent insider buying activity registered at three companies, as we attempt to figure out what might have spurred those companies’ insiders to purchase 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 (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 discussion by looking into the insider buying activity witnessed at Raymond James Financial Inc. (NYSE:RJF). Vice Chairman Francis S. Godbold purchased 22,000 shares on Friday at prices that ranged from $43.48 to $43.63 per share, lifting his overall stake to 183,000 shares. The shares of the financial services company have plummeted by more than 25% since the beginning of 2016, presumably because of the declining U.S equity market. The recent plunge has made the company’s price-to-earnings multiples more attractive to investors. For instance, Raymond James Financial Inc. (NYSE:RJF) trades at a forward P/E ratio of 10.48, which sits well below the average of 15.38 for the S&P 500 benchmark. A sustained decline in equity markets generally results in lower asset-based revenue for the company, but Raymond James Financial has been quite successful in operating amid volatile and deteriorating business conditions. Just recently, the company released its earnings report for the first quarter of fiscal year 2016, disclosing net revenue of $1.27 billion. The top-line results increased by 2% year-over-year, but dropped by 5% compared to the preceding quarter. The firm’s net income totaled $106.3 million or $0.73 per diluted share for the quarter, which represented a 16% year-over-year decrease and an 18% quarter-over-quarter decrease. Two financial hubs that have coverage on the stock, Nomura and Citigroup, downgraded RJF in January to ‘Neutral’ from ‘Buy’. A total of 20 hedge funds from our system had long positions in Raymond James Financial at the end of the September quarter, which accumulated 4.50% of its outstanding shares. Ken Griffin’s Citadel Advisors LLC lifted its stake in Raymond James Financial Inc. (NYSE:RJF) by 148% during the third quarter to 2.11 million shares.
KeyCorp (NYSE:KEY) has seen nine different insiders make big purchases so far this week, which is the kind of insider trading behavior individual investors should pay close attention to. So let’s take a look at the most noteworthy purchases. To begin with, Chairman and Chief Executive Officer Beth E. Mooney purchased 20,000 shares on Monday at a cost of $11.22 per share and currently owns 494,861 shares. Director Alexander M. Cutler snapped up 15,000 shares on the same day for $11.21 each, lifting his overall holding to 35,000 shares. William G. Gisel Jr., a member of the company’s Board, acquired 13,000 units of common stock on Tuesday at $10.86 apiece and now owns 17,900 shares. 15,000 shares were also purchased by Director Charles P. Cooley, who currently holds a 20,000-share stake. These shares were acquired at a price of $10.95 per share. Director Ruth Ann M. Gillis bought a 12,900-share stake on Tuesday at a price tag of $11.04 per share, which is held in a trust fund for the benefit of her children. The Director also holds a direct ownership stake of 11,700 shares.
The exploding insider buying activity comes after the financial services company released its earnings report for the fourth quarter. The shares of the company have lost 15% over the past year and trade at extremely attractive P/E ratios. The company has a forward P/E multiple of only 7.69, which might serve as an explanation for the increased insider buying at the company. There were 35 hedge funds tracked by Insider Monkey which were invested in the company at the end of September. Cliff Asness’ AQR Capital Management reported owning 19.80 million shares of KeyCorp (NYSE:KEY) through its 13F for the third quarter.
Simmons First National Corporation (NASDAQ:SFNC) is another company that had multiple insiders purchase shares this week. Senior Executive Vice President Marty D. Casteel purchased 500 shares on Tuesday at a price of $41.87 per share and currently holds a direct ownership stake of 54,757 shares. More noteworthy was Chairman and Chief Executive Officer George A. Makris buying a 10,000-share block on the same day at $41.07 apiece. After the recent purchase, the CEO currently owns a direct ownership stake of 126,292 shares. Last but not least, Executive Vice President Stephen C. Massanelli added 1,000 shares to his holding on Tuesday, which now comprises 11,840 shares. The 1,000 units of common stock were purchased at a price of $40.19 per unit.
The Arkansas-based financial holding company has seen its shares advance by 15% over the last year despite experiencing a significant pullback from the beginning of December through the end of last week, when the company released its financial results for the fourth quarter. The company reported record core earnings of $25.9 million for the quarter, which marked an increase of $14.5 million year-over-year. Its core earnings totaled $89.6 million for 2015, up by $50.9 million year-over-year. The company’s P/E multiples appear to suggest that its insiders are making the right decision by piling up more shares, so it remains to be seen whether the stock will deliver the expected performance in the upcoming months. Sharif Siddiqui’s Alpenglow Capital acquired a 45,400-share stake in Simmons First National Corporation (NASDAQ:SFNC) during the third quarter.