High-ranking executives have more knowledge and insight concerning the state of their companies, the market conditions within their industries, and possible future developments than any analyst or investor out there. If corporate insiders are buying shares of their own companies, they usually see great potential in those shares. That does not necessarily mean that insiders tend to buy ahead of an imminent takeover, new drug approval or earnings surprise, but they usually have a better understanding of whether the market appropriately values their companies’ firm-specific developments and industry trends. When executives and directors notice that the market is not appropriately responding to changing market conditions or new product developments, insiders usually buy those seemingly cheap, undervalued stocks. In fact, past research shows that corporate insiders are great at trading equities, and that retail investors have a better chance of picking potential winners by smartly following insiders’ moves. Insider Monkey processed a few dozen Form 4 filings submitted with the SEC on Monday and pinned down three companies with noteworthy insider purchases that could be worth emulating.
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 imitating 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).
Let’s begin our discussion by looking into the insider trading behavior witnessed at Acacia Research Corp (NASDAQ:ACTG), which saw two corporate insiders purchase sizable blocks of shares this past week. To start with, Interim Chief Executive Officer Marvin Key purchased 65,000 shares on Thursday at a cost of $3.76 per share, lifting his overall holding to 135,833 shares. The CEO snapped up an additional 35,000 shares at the beginning of this month for $3.17 each. Moreover, G. Louis Graziadio III, a member of the company’s Board of Directors since February 2002, purchased 74,196 shares on Thursday at a price of $3.79 per share, which increased his overall stake to 159,931 shares.
Interestingly enough, the CEO’s 35,000-share purchase in early March was followed by an unsolicited proposal from ARC Acquisition Company LLC to purchase all outstanding common stock of Acacia Research for $3.72 per share. On March 16, Acacia Research Corp (NASDAQ:ACTG) announced that its Board of Directors had determined that the aforementioned proposal was inadequate. The company’s Board, including the interim CEO, expressed its belief that the shares of Acacia Research are undervalued at current levels, which surely explains the reasoning behind the CEO’s own purchases. The recent announcement made by Acacia Research’s management stated: “At this time, the Company is not for sale”.
Acacia Research engages in licensing and enforcing patent technologies by partnering with investors and patent owners to unlock the financial value in their patented inventions. It should also be mentioned that the company’s Board of Directors also announced the approval of a Tax Benefits Preservation Plan, aimed at protecting the company’s ability to use net operating loss carryforwards (NOLs) and tax credits to offset future taxable income. This plan was designed to reduce the odds that Acacia Research will undergo an ownership change, as the company cannot use its NOLs if facing such a change. Shares of Acacia Research are down by 3% since the beginning of 2016 despite having gained 7% in the past month. John W. Rogers’ Ariel Investments reported ownership of 3.58 million shares of Acacia Research Corp (NASDAQ:ACTG) through the latest round of 13F filings.