While it is widely known that corporate insiders buy shares of their companies on the open market for one simple reason – they believe Mr. Market severely undervalues those shares, insider trading watchers should still be very careful when deciding whether an insider purchase is informative or not. It is true that insider purchases on the open market tend to beat the broader market on aggregate, but the key word here is aggregate. For that reason, Insider Monkey would like to recommend three tips that can enable retail investors to identify informative insider purchases. The most important tip of those three would be to look for clusters of insider buying, which usually implies that there is a consensus among insiders that their companies’ shares are undervalued. Another tip would be to avoid insider transactions conducted under pre-arranged trading plans, as fresh research shows that spur-of-the-moment insider purchases generate higher returns than those conducted under trading plans. Last but not least, insider trading watchers should look for long-time insiders, not newly-appointed directors or executives, who purchase shares for the first time, as there must be a strong reason why those insiders decided to initiate stakes after serving at the company for a few years. Meanwhile, Insider Monkey processed most Form 4 filings submitted with the SEC on Thursday and pinpointed three companies with relatively notable insider buying, of which one has been consistently registering insider buying in the past several weeks or so.
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).
While we don’t usually cover the insider buying activity of a particular company over and over again, the recent insider buying witnessed at Ambac Financial Group Inc. (NASDAQ:AMBC) simply cannot be passed up. To begin with, Director Alexander David Greene snapped up 10,000 shares on Wednesday at a price tag of $15.05 per share, boosting his overall holding to 13,000 shares. Moreover, Chief Executive Officer Nader Tavakoli bought 16,200 shares on the same day for $14.84 per share, which lifted his ownership to 179,487 shares.
The U.S. bond insurer, which emerged from bankruptcy in 2013 after getting beaten down in the financial crisis of 2008, has been challenged by activist hedge fund Canyon Capital Advisors LLC, co-founded by Joshua Friedman and Mitchell Julis, to accelerate the settlement of $4 billion in insurance claims. Canyon Capital launched a proxy fight in mid-March, nominating three director nominees, including Frederick Arnold, John Brecker, and Eugene Davis, for election to the Board at the company’s upcoming meeting of shareholders. According to fresh filings, the Los Angeles-based hedge fund owns 2.2 million shares of Ambac Financial Group Inc. (NASDAQ:AMBC) that are currently valued at approximately $32 million, but the fund’s credit exposure, including deferred payments, is believed to be as much as $376 million. The bond insurer has urged shareholders to support the current slate of directors at the company’s upcoming meeting of shareholders, saying that “Canyon has as its singular objective the accelerated payment of Canyon’s credit claims, not the best interests of Ambac’s shareholders”. Ambac Financial’s both financial position and stock performance have been also weighted by its exposure to the Commonwealth of Puerto Rico, which has announced that its cannot meet its obligations, as well as revealed plans to impair some of its creditors (or all creditors). According to a fresh news story written by Reuters, Ambac Financial is competing to acquire industry peer CIFG Assurance North America (whose Chairman is Canyon’s director nominee, Eugene Davis), which may serve as an alternative revenue source for the company. The shares of the New York City-based bond insurer are down 42% in the past 12 months, but are 3% in the green year-to-date. The hedge fund sentiment towards Ambac Financial declined notably in the fourth quarter of 2015, with the number of funds invested in the company shrinking to 16 from 27 quarter-on-quarter.