Reporting earnings that are below investors’ expectations once in a while generally doesn’t cause investors to change their outlook for the company over the long-term. However, if a company reports earnings that are significantly below expectations or if a company misses earnings expectations quarter after quarter, it can spook investors and crush the company’s stock eventually. During such times, if insiders step in and buy shares of their companies, not only does it help in restoring investors’ faith in the company, it also acts as an open declaration that things might not be as bad as they are being perceived. Three such companies and the recent trading activity in them are going to be the focus of this article, and they are: Joy Global Inc. (NYSE:JOY), Barnes & Noble, Inc. (NYSE:BKS), and Cherokee Inc (NASDAQ:CHKE).
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 118% over the ensuing 36 months, outperforming the S&P 500 Index by over 60 percentage points (read the 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 start with the insider buying in mining equipment manufacturer Joy Global Inc. (NYSE:JOY). On September 16, Mark Joseph Gliebe, who serves as an Independent Director of the company, acquired 5,500 shares at a weighted average price of $19.04 per share and now owns 10,748 shares of Joy Global Inc. (NYSE:JOY). The stock of Joy Global remained relatively range-bound throughout the first four months of the year, but the downward move it embarked upon beginning in May has resulted in it losing almost 64% year-to-date. A large part of that decline came after Joy Global reported its fiscal 2015 third quarter earnings on September 3. Whereas the Street was expecting the company to report EPS of $0.62 on revenue of $798.17 million for the quarter, it reported EPS of $0.54 on revenue of $792 million. Since Joy Global currently pays a quarterly dividend of $0.20, this recent correction in its stock has caused its annual dividend yield to soar to 4.63%. Jeffrey Bersh and Michael Wartell‘s Venor Capital Management was one of the hedge funds that initiated a stake in the company during the second quarter and held 768,300 shares of Joy Global as of June 30.