Some retail investors track insider trading behavior as part of their broader stock selection and analysis process, and rightly so. Past research concludes that insider purchases tend to beat broader market benchmarks on aggregate. But the key word in this statement is “aggregate”, which means that a majority of purchases likely predict future share price appreciation, but not all. Nonetheless, there is a way to filter the most informative and predictive insider buying activity. First and foremost, retail investors should look for clusters of buying, which usually serve as more reliable bullish indicators than small, individual purchases. What’s more, investors should not blindly mimic insiders’ behavior (though this practice may yield impressive results over the long-term), but rather, should focus on pairing insider buying with a sound investment thesis. Insider Monkey processed dozens of Form 4 filings submitted with the SEC on Wednesday and stumbled upon three companies with clusters of insider buying.
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).
Four Different Executives at This Insurance and Reinsurance Company Bought Shares This Week
Let’s begin our discussion by having a look at the insider buying witnessed at XL Group plc (NYSE:XL), which has seen four different executives purchase shares this week. To start with, Chief Human Resources Officer Eileen G. Whelley bought 1,500 shares on Tuesday for $32.30 each, lifting her ownership to 16,966 shares. Paul David Brand, Chief Underwriting Officer for Insurance, purchased 11,300 shares on the same day at $32.01 apiece, which boosted his overall holding to 172,337 shares. Greg Hendrick, Chief Executive of Insurance Operations, snapped up 8,000 ordinary shares on Monday at a price of $32.43 per share, after which Mr. Hendrick owns 130,738 shares. Chief Financial Officer Peter R. Porrino also recently filed, to disclose the purchase of 15,300 shares on Monday at prices that ranged from $32.85 to $33.00 per share. Following the recent purchase, Mr. Porrino currently holds an ownership stake of 120,358 shares.
The shares of the global insurance and reinsurance company have dropped by 17% since the beginning of the year, partly owing to a seemingly disappointing first quarter earnings report released last week. XL Group plc (NYSE:XL)’s operating net income for the first quarter was $103.4 million, down from $194.4 million reported for the same quarter of the prior year. However, the 2016 figure includes roughly $55.0 million in integration costs related to the $4.1 billion cash-and-stock acquisition of Catlin Group Ltd, which was completed in May 2015, as well as $52.8 million in natural catastrophe losses versus the $14.7 million in catastrophe losses recognized a year ago.
In mid-February, analysts at Deutsche Bank downgraded the stock to ‘Sell’ from ‘Hold’ and cut their price target on it to $34 from $40, citing analyst hopes for improving loss ratios that may not materialize after all. Meanwhile, the stock is priced at 8.8-times expected earnings, significantly below the forward P/E multiple of 12.7 for the property and casualty insurance sector. London-based LMR Partners, founded by Ben Levine, Andrew Manuel and Stefan Renold, acquired a new stake of 24,768 shares of XL Group plc (NYSE:XL) during the March quarter.