With the winter holidays rapidly approaching, some companies’ insiders have been investing more capital in stocks instead of buying more gifts for family and friends. It is highly likely that the bullish camp of insiders are buying shares on the belief that they are greatly undervalued by the broader market. Most of the time, insiders’ purchases tend to greatly outperform broader market benchmarks, which is not surprising if bearing in mind that these well-informed individuals have a better understanding about their companies’ businesses, their ongoing challenges and future prospects. For that reason, this article will discuss several noteworthy insider buys reported at three US-listed companies and will also cover the recent performance of those 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. 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 discussion by investigating the insider trading activity witnessed at Prospect Capital Corporation (NASDAQ:PSEC), which has seen heavy insider buys in recent weeks. To begin with, Chief Executive Officer John F. Barry purchased 1.05 million shares last week at prices that ranged from $6.20-to-$6.63 per share, boosting his overall holding to 7.31 million shares. Moreover, President and Chief Operating Officer M. Grier Eliasek snapped up 20,000 shares last Tuesday at a cost of $6.28 per share and currently owns 372,196 shares. Last but not least, Brian H. Oswald, Chief Financial Officer, Chief Compliance Officer, Secretary and Treasurer, bought a 10,000-share block last Monday at a price of $6.3 per share, lifting his stake to 475,000 shares. The business development company that mainly lends to and invests in middle market private companies has seen its shares decline 19% so far in 2015, after plummeting by more than 11% since the beginning of December. This sharp drop has been presumably triggered by concerns about the company’s exposure to the energy sector and its investments in high-yield bonds. Prospect Capital Corporation (NASDAQ:PSEC) mainly invests in senior and subordinated debt and equity of private companies, while some of its equity positions are subject to substantial changes in value. Thus, some of energy-related equity positions dropped in value as a result of the depressed energy markets. Scopia Capital Management, founded by Matt Sirovich and Jeremy Mindich, reported owning 2.26 million shares of Prospect Capital Corporation (NASDAQ:PSEC) through the latest round of 13F filings.