Insiders Give Vote of Confidence to Struggling Manufacturer, 2 Energy Companies

Corporate insiders comprehend better than anyone else the fundamentals of their companies and have a better understanding of their future prospects than any consultant, analyst or other non-insider market participant. Therefore, when insiders spend a substantial part of their hard-earned money on buying their companies’ stock, you know that insiders believe the market undervalues their companies’ potential. Hence, following their moves can yield higher odds of picking a winner. Peter Lynch, one of the most successful and widely-known investment gurus, once claimed that “insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise”. The Insider Monkey team identified three companies with notable insider buying activity, and this article will discuss some recent firm-specific developments that might have guided those insiders to buy 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. 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.

Titan International Inc. (NYSE:TWI) is among the three companies that have seen a large volume of insider trading activity on the buy side recently. Director Peter McNitt reported the acquisition of a 25,000-share stake on Wednesday at a price of $4.56 per share, which is held by the Peter McNitt Living Trust. The manufacturer of wheels, tires, wheel and tire assemblies, and undercarriage systems and components for off-highway vehicles has experienced a terrible year in terms of both stock and financial performance so far. Shares of Titan International Inc. (NYSE:TWI) are 59% in the red year-to-date, mainly due to the struggling agricultural market, which generates slightly more than 50% of the company’s net sales. Titan International reported sales of $308.8 million for the third quarter, down by 31% year-over-year. At the same time, net sales generated from the agricultural market added up to $157.4 million, compared to $227.7 million reported for the same period of last year. The sluggish demand for high horsepower equipment in the agricultural market and the impact of currency translation are two main factors that impacted Titan’s top-line figure in the third quarter.

The number of smart money investors with positions in the struggling manufacturer climbed to 19 from 16 during the third quarter, with them owning almost 22% of the company’s outstanding stock in aggregate. Mark Rachesky’s MHR Fund Management is by far the largest shareholder of Titan International Inc. (NYSE:TWI) among those 19 hedge funds, owning 8.01 million shares as of September 30.

Let’s head to the next page, where the insider buys registered at Rice Energy Inc. (NYSE:RICE) and Tidewater Inc. (NYSE:TDW) are closely examined and discussed.

Moving on to Rice Energy Inc. (NYSE:RICE), President and Chief Operating Officer Toby Z. Rice purchased 7,500 shares on Monday for $13.30 each and currently holds 44,649 shares. His spouse also holds an ownership stake of 16,794 shares. One of Peter Lynch’s investing principles says: “Never bet on comeback while they’re playing Taps”. This principle suggests that it’s foolish to buy more shares of a company that is on the edge of failure and to anticipate further deteriorating fundamentals. Of course, Carl Icahn and other investors might not entirely agree with this principle, but the COO’s recent purchase might point to a rebound in the forthcoming future for the struggling independent natural gas and oil company. The company’s natural gas, oil and NGL sales amounted to $130.1 million for the third quarter, compared to $67.8 million reported last year. This increase is mainly attributable to increased drilling and completion activity, which was in turn offset by a decrease in realized prices. However, the company has entered into various financial commodity derivative contracts in order to reduce its risk exposure to the volatility of oil and natural gas prices.

23 hedge funds tracked by Insider Monkey had stakes in the company at the end of the third quarter, with them having stockpiled 22.00% of the company’s shares at that time. Ken Griffin’s Citadel Advisors LLC owned 11.36 million shares of Rice Energy Inc. (NYSE:RICE) at the end of September.

Finally, Tidewater Inc. (NYSE:TDW) is another company that has registered a relatively sizable inside purchase this week. Director Richard T. du Moulin reported purchasing 10,000 shares on Monday at $9.20 per share, 8,000 shares of which are owned by his children. After the recent purchase, the Director holds a direct ownership stake of 25,000 shares. The provider of offshore service vessels and marine support services to the offshore energy industry has had a disastrous year in terms of stock performance, with its shares declining by 70% year-to-date. The main driver of the company’s business is the level of its customers’ capital spending for offshore oil and natural gas exploration and production, which clearly explains the terrible stock performance. At the same time, Tidewater anticipates that its long-term utilization rates for its vessels will strongly correlate with the demand and price of crude oil, so the company’s financial figures may still disappoint its investors in the upcoming quarters. However, a potential decrease in the levels of supply and increase in demand for crude oil and natural gas will assist the company in achieving a much-awaited turnaround.

The number of hedge fund investors from our database invested in the company at the end of September stood at 16, up by three quarter-over-quarter. Renaissance Technologies was among the investment firms that added Tidewater Inc. (NYSE:TDW) to their portfolios during the third quarter, holding 102,000 shares of it on September 30.

Disclosure: None