Insider trading is a term many stock market laymen associate with illegal conduct, but insider trading activity involves both legal and illegal trades. Past research has shown that insider trading activity represents an informative barometer regarding major shifts in broader market or sector sentiment. One can look back at the massive insider buying in energy and banking stocks at the beginning of 2016 to realize the truth of these words. However, investors monitoring insider trading metrics should not blindly mimic each insider purchase or sale. Rather, they need to figure out the actual motivation behind each insider move. While insider buying is relatively straightforward to interpret, an accurate interpretation of insider selling is much more difficult. The CEO of a public company filed earlier this week to report the sale of two large blocks of shares, saying the cash proceeds would be used to purchase a residence. So while some insiders disclose the reason behind their moves in public filings, most of them do not. Leaving this discussion aside, let’s proceed to a study of several noteworthy insider transactions reported with the SEC on Thursday by corporate insiders at five U.S companies.
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).
Aftermarket Auto-Parts Provider’s CEO Buys Shares
Advance Auto Parts Inc. (NYSE:AAP)’s Chief Executive Officer, Thomas Greco, purchased 6,700 shares on Tuesday at a cost of $150.82 per share. After the recent purchase, Mr. Greco currently holds an ownership stake of 35,904 shares.
The North American automotive aftermarket parts provider has seen its market value jump by 4% since the beginning of 2016. Advance Auto Parts Inc. (NYSE:AAP)’s performance in recent years has been weighed on by the slower-than-anticipated integration of Carquest stores acquired with its purchase of General Parts International for roughly $2 billion in cash in October 2013, a takeover that created one of North America’s largest aftermarket auto-parts providers. The company faces tough competition from industry rivals, which has put significant pressure on sales growth and margins. However, Credit Suisse analysts believe that the freshly-appointed CEO “has a track record of turning around business units that were losing share and had weak productivity”, so the company may have a bright future ahead. Jeffrey Smith’s Starboard Value LP was the owner of 1.71 million shares of Advance Auto Parts Inc. (NYSE:AAP) at the end of March.
Board Member of Industry Leader in Patent Licensing Buys Shares
According to a fresh Form 4 filing, Frank E. Walsh III, a member of Acacia Research Corp (NASDAQ:ACTG)’s Board of Directors, bought 40,000 shares on Thursday for roughly $5.00 each, lifting his overall holding to 200,000 shares.
In early March, the self-named industry leader in patent licensing received an offer from ARC Acquisition Company LLC to purchase all of Acacia’s outstanding shares for $3.72 in cash, but the company’s Board, which did not include Mr. Walsh at the time, decided that the proposal was inadequate. The boardroom also expressed its belief that the company’s shares were undervalued at the time, and they turned out to be right given that the stock is now nearly 37% higher than the refused cash offer. Acacia Research Corp (NASDAQ:ACTG), which invests in patented technologies, as well as licenses and enforces patents, has seen its shares gain 18% thus far in 2016. Mark Broach’s Manatuck Hill Partners acquired a new stake of 300,000 shares of Acacia Research Corp (NASDAQ:ACTG) during the January-to-March period.
Let’s head to the next page of this insider trading article, where we will discuss the insider trading activity registered at three other companies.