A lot of investors are under the misconception that any insider trading is illegal. Quite to the contrary, barring trades that are not registered with the SEC or trades that are based on material information that hasn’t been made available to other stockholders, insider trading is perfectly legal and common. While some might debate the merits of insider trading, one thing that no one can argue is that usually, insiders have a better sense of the company’s momentum and prospects than the average investor. Hence it is not a coincidence that are correlations between insider buying and slightly better stock performance for that company in the short to medium term. While insider selling is not as strong a signal, it too can nonetheless provide valuable insight into the prevailing mood surrounding a company’s stock by its insiders. This is why we vigorously track insider trading at Insider Monkey, and in this article we are going to look closely at two stocks in which insiders have recently sold shares: American States Water Co (NYSE:AWR), and Delek US Holdings, Inc. (NYSE:DK).
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 more than 118% over the ensuing 36 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.
Let’s start by analyzing the insider selling in American States Water Co (NYSE:AWR), a parent company with a lot of utility companies under its umbrella. On September 1, three Independent Directors of the company reduced their stakes in it. Lloyd Ross sold 300 shares at an average price of $36.73 per share, reducing his total holdings to 52,398 shares. Anne Holloway brought her stake down to 43,552 shares by selling 5,450 shares at an average price of $36.95 per share. Sarah Anderson disposed of 330 shares at an average price of $36.86 per share and now owns 8,600 shares. As of February 2014, American States Water Co (NYSE:AWR) provides water to around 246,000 customers and electricity to over 23,000 customers in the state of California and has a 50-year privatization contract with the U.S. government. Shares of the company have remained relatively range-bound throughout the year, trading between $36 and $41.50. For the second quarter of 2015, American States Water Co (NYSE:AWR) reported EPS of $0.41 on revenue of $114.60 million, compared to analysts’ estimates of EPS of $0.41 on revenue of $118.40 million. Hedge funds that initiated a stake in the company during the April-June period included Matthew Hulsizer‘s Peak6 Capital Management and Peter Rathjens, Bruce Clarke and John Campbell‘s Arrowstreet Capital. The firms owned 7,503 shares and 46,931 shares at the end of June, respectively.
Moving on to Delek US Holdings, Inc. (NYSE:DK), Charles Leonard, an Independent Director of the company reduced his stake to 22,880 shares by selling 4,500 shares at an average price of $28.65 per share on September 4. Shares of the Brentwood, Tennessee-based petroleum refiner rose by more than 40% during the first quarter of 2015, however, they have lost most of those gains over the last two months and currently trade up by just 3.65% year-to-date. The company reported in February that it was being investigated by the SEC for issues related to two revisions it made to financial statements issued in 2011 and 2012, as well as its general internal control over its financial reporting. There have yet to be further updates from the company on the matter. Most analysts who cover the stock are bullish on it, despite the dark cloud. On August 21, analysts at Barclays reiterated their ‘Overweight’ rating on the stock, while upping their price target to $44 from $43, which represents a potential rise of greater than 50% over the stock’s current price. Among the hedge funds covered by us, billionaire David E. Shaw‘s firm D.E. Shaw was the largest shareholder of the company at the end of June, owning almost 4.47 million shares.
Disclosure: None
