Insider Buying Shines Spotlight on 3 Stocks That Look Cheap

The question most investors do not have an answer to is whether the recent downfall in U.S equities will be short-lived or will mark the beginning of a longer-term bear market. The Dow Jones Industrial Average and the S&P 500 Index are in correction territory at the moment, after declining by approximately 8% since the beginning of the year. It appears that both individual and larger-scale investors are afraid of a stock market meltdown similar to the one experienced back in 2007, so they want to get out of equities as quickly as possible. Yes, there are several reasons investors should worry, which include the sustained decline in energy prices, a relatively strong U.S dollar, and sluggish global economic growth. But it all comes down to the ability of the U.S economy to keep growing in the face of numerous headwinds. Meanwhile, several publicly-traded companies witnessed noteworthy insider purchases recently, which could point to attractive investment opportunities. As a general rule, insider buying should be perceived as a bullish signal, as an insider is not going to invest his or her hard-earned capital in their company’s stock without expecting an attractive return, especially at the risk of being less diversified. So let’s proceed with the discussion of the insider buying registered at those three struggling companies.

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.

Xcerra Corp (NASDAQ:XCRA) had one of its top executives buy shares this past week. President and Chief Executive Officer David G. Tacelli acquired 30,000 shares on Friday at a weighted average cost of $5.17, lifting his overall holding to 1.10 million units of common stock. The company provides test and handling capital equipment, interface products, test fixtures, and services to the semiconductor, industrial, and electronics manufacturing industries. To be more specific, the company mainly offers test solutions to electronics manufacturing companies that use semiconductors and printed circuit board (PCB) test systems as main components. Xcerra Corp (NASDAQ:XCRA)’s shares are down by 35% over the past year, mainly owing to the company’s weak financial performance. Although the stock trades at a relatively cheap trailing price-to-earnings ratio of 16.31 (the ratio is 21.04 for the S&P 500 companies), one should not overlook the company’s disappointing revenue growth in recent quarters. Xcerra’s net sales for the three months that ended October 31 totaled $78.40 million, down from $116.22 million reported a year earlier. The aforementioned valuation metric bears no importance if considering the weakening demand for the company’s products. However, Xcerra’s recent insider buying might suggest that the company is just about to embark on a recovery path, so investors should keep a close eye on the company’s upcoming earnings reports. A total of 19 hedge funds from our system were invested in the company at the end of the third quarter, amassing 14.20% of its shares. Brett Hendrickson’s Nokomis Capital, which owned 2.53 million shares in Xcerra Corp (NASDAQ:XCRA) on September 30, was one of the most bullish investors of Xcerra within our database.

Let’s head to the next two pages of this daily insider trading article, where we discuss the insider buying registered at Earthstone Energy Inc. (NYSEMKT:ESTE) and Esperion Therapeutics Inc. (NASDAQ:ESPR).

Earthstone Energy Inc. (NYSEMKT:ESTE) is another struggling company that saw an insider purchase shares last week. Director Jay F. Joliat reported purchasing a new stake of 10,000 shares last Thursday at prices that ranged from $11.55 per share to $12.42 per share, which is held indirectly through Beefcarver Inc. The shares of the independent oil and gas exploration and production company have lost 43% since the end of January 2015. On December 16, Earthstone Energy and Lynden Energy sealed a merger agreement, under which Earthstone is set to purchase all of the outstanding shares of Lynden. Lynden shareholders will receive 0.02842 of a share of Earthstone common stock in exchange for each share of Lynden owned, while the acquirer will issue roughly 3.7 million shares of common stock to finance the deal.

Earthstone Energy’s oil revenue for the nine months that ended September 30 grew by $6.3 million or 25% year-over-year to $32.59 million, due to increased volume, which was in turn offset by a decrease in realized prices. It is important to note that the company’s lease operating expenses (which include all costs associated with the operation of wells and related facilities for operated and non-operated properties) on a unit-of-production basis decreased to $9.18 per BOE for the first nine months of 2015, from $10.95 during the same period of 2014. The decrease was mainly attributable to a decline in the cost of oil field services and to economies of scale on its operated Eagle Ford property. Therefore, it appears that the company is well-positioned to endure the low crude oil price environment and thrive when the crude oil supply glut starts to fade away, considering its strong balance sheet, low production costs, and expansion efforts. Jim Simons’ Renaissance Technologies sold out its 15,563-share stake in Earthstone Energy Inc. (NYSEMKT:ESTE) during the third quarter.

Last but not least, Esperion Therapeutics Inc. (NASDAQ:ESPR) also had one of its most influential insiders buy shares last week. President and Chief Executive Officer Timothy M. Mayleben snapped up 7,200 shares on Friday at prices that fell between $13.84 and $14.66 per share. After the recent purchases, the CEO currently holds an ownership stake of 31,014 shares. The pharmaceutical company that focuses on developing low-density lipoprotein cholesterol (LDL-C) lowering therapies for the treatment of patients with hypercholesterolemia has seen its share price decline by 70% over the past year.

Esperion Therapeutics held an End-of-Phase 2 meeting regarding its lead product candidate ETC-1002 with the FDA in August 2015, and stated that it would not have to complete a cardiovascular outcomes trial (CVOT), thus having a “clear regulatory path forward for development and approval of ETC-1002″. However, on September 28, the company announced that the FDA had actually encouraged the company to start a CVOT, while those cardiovascular trials might be necessary to gain approval of ETC-1002. The stock plummeted significantly on the back of the news and it has not managed to recover since then. Hence, the aforementioned purchase might be seen as a sign of management’s confidence in the future of ETC-1002 and the company’s overall performance. The smart money sentiment towards the stock was very negative in the third quarter on that news however, as the number of money managers that we track which had positions in the company dropped to 18 from 28 quarter-over-quarter. Rob Citrone’s Discovery Capital Management acquired a 524,200-share stake in Esperion Therapeutics Inc. (NASDAQ:ESPR) during the July-to-September period.

Disclosure: None