Like it or not, corporate executives and directors are generally the ones who have more knowledge about their companies’ prospects than anyone else. They are well-informed of the cyclical trends, order flow, production bottlenecks, costs and other factors that influence their companies’ businesses, so corporate insiders’ stock transactions bear useful information. Numerous studies have revealed that insider purchases lead to those stocks outperforming the broader market over the mid-term, which is the reason why investors should closely examine insider activity. In this article we’ll be discussing a few companies that had big insider transactions yesterday. TerraForm Global Inc. (NASDAQ:GLBL) and SunEdison Inc. (NYSE:SUNE) saw some of their corporate insiders buy their shares, while Align Technology Inc. (NASDAQ:ALGN) registered noteworthy insider selling activity.
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 118% over the ensuing 35 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 taking a closer look at SunEdison Inc. (NYSE:SUNE)’s renewable-energy spin-off, TerraForm Global Inc. (NASDAQ:GLBL). Carlos Domenech Zornoza, Chief Executive Officer at TerraForm, bought 15,625 shares for $8.05 each through a single transaction on August 25. Following this transaction, the CEO now owns a 1.37 million-share stake worth $11.61 million. The shares of the freshly spun-off company have lost over 40% since the company’s IPO on July 31. It’s worth noting that TerraForm Global Inc. (NASDAQ:GLBL) initially planned to sell its stock to the public at $19 to $21 per share, but ended up selling for an IPO share price of $15. This might suggest that the market isn’t sure if the company that owns and operates renewable energy generation assets worldwide can deliver good performance over the next few years.