Last week’s dollar volume of insider buying, excluding those purchases made by top 10% owners who are mostly categorized as investors rather than highly-informed insiders, has reached the lowest figure in the past several months. Similarly, the volume of insider selling fell quite notably week-over-week, but not as sharply as the volume of insider buying. The soft insider trading activity could be primarily explained by the soon-to-start first-quarter earnings season, which unofficially kicks off with the release of Alcoa Inc. (NYSE:AA)’s earnings report this Monday. The outlook for the upcoming earnings season does not look so bright, considering that S&P 500 companies are anticipated to post a first-quarter earnings drop of 9.1%. This sharp decline would mark the deepest quarterly earnings decline since the financial crisis of 2008, but some tend to believe that the decline will not be as severe as anticipated. As a result, one might expect U.S. equities to continue their sloppy bull run, as more companies can deliver earnings surprises given the grim expectations. Going back to the main aim of this article, Insider Monkey processed the few Form 4 filings submitted with the SEC on Friday and identified three companies with relatively noteworthy insider buying (just recall that last week’s insider buying was the weakest in months).
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 the discussion by taking an in-depth look at the insider buying registered at MTS Systems Corporation (NASDAQ:MTSC). President and Chief Executive Officer Jeffrey A. Graves bought a mere 322 shares on Friday for $51.83 apiece, lifting his ownership to 18,718 shares. Moreover, Director Chun Hung Yu purchased a much bigger block of shares on the same day, which consisted of 2,000 shares. That block was purchased at exactly $52 apiece, with the purchase boosting the Director’s holding to 9,345 units of common stock. The recent insider buying activity comes after the shares of the supplier of high-performance test systems and position sensors plunged on the announcement of a merger agreement to acquire sensors manufacturer PCB Group Inc. for $580 million. Shares of MTS Systems have fallen 15% in the past five days and are down 30% in the past 12 months, so the recent insider buying might suggest that the stock has entered the “cheap zone”.
PCB Group operates as a manufacturer of piezoelectric quartz sensors, accelerometers, and associated electronics that measure dynamic pressure, force and vibration. The merger between MTS Systems Corporation (NASDAQ:MTSC) and PCB Group is said to create a technology-leading “Test and Measurement” solutions provider serving a broad consumer base that includes original equipment manufacturers in automotive, aerospace, infrastructure and industrial products, as well as universities and research laboratories. MTS Systems plans to fund the merger with a combination of new debt and equity issuance, with the latter being anticipated to dilute current shareholders’ ownership. In fact, a possible dilutive share offering appears to explain the massive plunge in the share price of MTS Systems. Meanwhile, the soon-to-be combined company anticipates to achieve annualized revenue synergies of $20 to $30 million, as well as annualized cost synergies of $5 to $7 million over the next three to four years. The revenue-type of synergies are anticipated to be achieved from supplementary sales of MTS products to PCB Group’s current customer base and additional sales of PBC products to the acquirer’s customer base.
Shares of MTS are currently trading at 15.6 times expected earnings, below the forward P/E multiple of 17.4 for the S&P 500 benchmark. A total of 11 hedge funds from our system were invested in MTS at the end of December, amassing roughly 17% of the company’s total number shares. John W. Rogers’ Ariel Investments reported ownership of 1.57 million shares in MTS Systems Corporation (NASDAQ:MTSC) through its 13F filing for the final quarter of 2015.