Generally, insider buying is believed to suggest management’s confidence in the company and its future outlook, whereas insider selling is usually seen as a bearish sign (however, insider selling may occur for numerous reasons unrelated to a company’s prospects). Therefore, investors, traders, and institutions might actually get a sense of different stocks’ prospects by tracking and examining insider trading activity. Even more to that, research has shown that investors can capitalize on insider knowledge by following insider trading activity and generate attractive returns from that. Ultimately, we identified three companies that registered noteworthy insider trading activity yesterday: Inovalon Holdings Inc. (NASDAQ:INOV), Impax Laboratories Inc. (NASDAQ:IPXL), and Integrated Silicon Solution Inc. (NASDAQ:ISSI). We’ll discuss in more detail the stock transactions associated with these companies’ insiders and the potential reasoning behind their moves.
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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 35 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.
We’ll start with Inovalon Holdings Inc. (NASDAQ:INOV), a technology company that offers advanced cloud-based data analytics and data-driven intervention platforms to the U.S. healthcare industry. One of the company’s Independent Directors, Lee Roberts, purchased 19,000 shares through a single transaction dated August 27, at a price of $21.06 per share. After the transaction, the director owns a 26,698 share-stake in the company. Allegedly, the aforementioned transaction might be related to Inovalon’s recent acquisition of Avalere Health Inc., a provider of data-driven advisory services and business intelligence solutions to the pharmaceutical and life sciences industry. The freshly-announced $140 million deal is set to expand Inovalon’s leadership in the healthcare marketplace and allow the acquirer to expand into an expansive adjacent market. Avalere is already serving most of the top pharmaceutical companies in the United States and generated $47.1 million in revenues for fiscal 2014, so the deal is expected to bear much fruit for Inovalon. Considering that the shares of Inovalon are down by 21% year-to-date, they might be trading at a bargain price at the moment. Israel Englander’s Millennium Management is one of the shareholders of Inovalon Holdings Inc. (NASDAQ:INOV), owning 142,221 shares at the end of June.
Let’s now see what the insider selling activity at Impax Laboratories Inc. (NASDAQ:IPXL) might tell us. The specialty pharmaceutical company had three different insiders sell its stock this week. Mark A. Schlossberg, who has been serving as Senior Vice President, General Counsel and Corporate Secretary at the company since May 2011, reported selling 4,649 shares for $43.41 each on August 27, reducing his stake to 81,045 shares. Peter R. Terreri, one of the company’s directors, also unloaded 4,833 shares on the same day, at a price of $43.93 per share. After selling these shares, Peter Terreri now owns 39,787 shares. Michael Markbreiter, another Director of Impax Laboratories, also offloaded 19,399 shares this week and continues to hold an 8,200 share-stake; it’s worth noting that the director exercised 10,000 stock options to buy the company’s stock. The shares of the pharmaceutical company have gained nearly 39% since the beginning of the year even though the stock suffered a decline over the last few weeks, so the recent sell-offs might suggest that the downtrend is there to last. Impax Laboratories recently posted its financial results for the second quarter, reporting adjusted diluted earnings per share (EPS) of $0.34, compared to EPS of $0.60 reported a year ago. Samuel Isaly’s Orbimed Advisors, a healthcare-focused fund that we track, owns a 6.74 million-share stake in Impax Laboratories Inc. (NASDAQ:IPXL).
Finally, we’ll take a glance at the insider selling activity at Integrated Silicon Solution Inc. (NASDAQ:ISSI). Kong Yeu Han, who has acted as Vice Chairman at the company since May 2005 and as a director since August 2005, sold 24,000 shares from his recently-exercised 60,000 non-qualified stock options. The exercise price of the options was $1.95, while the shares were sold for $21.83 per share. Following the transactions, Kong Yeu Han currently holds a 146,113 share-position. Even though the stock has gained more than 32% since the beginning of 2015, it is highly unlikely that the Vice Chairman sold the shares because of worries that the company’s stock will depreciate. If that was the case, he would have sold all the freshly-exercised stock options. The recent sell-off might be somewhat related to the sale of the company to a consortium of Chinese investors. The shareholders of Integrated Silicon Solution approved a $731 million offer made by the consortium, known as Uphill Investment Co., back in June. It’s worth noting that ISSI also received an unsolicited buyout offer from Cypress Semiconductor Corporation (NASDAQ:CY) recently. Farallon Capital, founded by Thomas Steyer, was among the largest equity holders in ISSI at the end of the second quarter, holding a stake of 1.07 million shares.
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