The insider trading activity decreased quite significantly last week as compared to the activity observed during the previous one, partially owing to the four-day workweek. However, the decline in the dollar volume of both insider buying and selling was too massive to be fully explained by the holiday-shortened week. Some companies may have started to close the trading windows for insiders ahead of the approaching first-quarter earnings season, which can serve as one explanation for last week’s sluggish insider trading activity. With analysts anticipating first-quarter earnings to decline a whopping 8.7% year-on-year, some investors may be worried that U.S. equities could resume the bearish course experienced at the beginning of the year. On the other hand, the first-quarter earnings season may serve as a positive catalyst for stock if bearing in mind the somewhat grim outlook on earnings, which could increase the odds of seeing more positive earnings surprises. Although last week’s volume of insider buying decreased remarkably week-over-week, there were some companies with clusters of insider buying. Thus, the following article primarily focuses on the insider buying activity witnessed at three companies.
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 our discussion with LKQ Corporation (NASDAQ:LKQ), which had five different insiders purchase shares this March. Nonetheless, this section will solely focus on those purchases that occurred last week. Paul M. Meister, member of the company’s Board of Directors since February 1999, purchased 10,000 shares on Thursday at prices that ranged from $30.03 to $30.04 per share, lifting his overall holding to 184,998 shares.
LKQ Corporation (NASDAQ:LKQ) is the largest provider of alternative vehicle collision and mechanical replacement parts in the United States, serving most major markets across the North American continent. The company primarily derives its revenue from two categories: parts and services; and other. LKQ’s parts and services revenue is mainly generated from the sale of vehicle replacement products and related services to collision and mechanical repair shops, while the company’s other sources of revenue involve scrap sales and sales of aluminum ingots and sows. Declining aluminum prices, which were impacted by excess production, falling crude oil prices, and weak demand, put some pressure on LKQ’s stock performance throughout the first two months of this year. However, the stock has quickly recovered since mid-February, gaining almost 2% year-to-date. It is anticipated that cheap gas prices will encourage more driving across the nation, which could subsequently result in a higher number of car accidents and more business for LKQ Corporation. The company’s 2015 total revenue reached $7.19 billion, up from $6.74 billion in 2014. Parts and services revenue, which accounted for approximately 93% of total revenue, increased 10.3% year-on-year to $6.71 billion. Meanwhile, LKQ’s other revenue declined 26.7% year-on-year, mainly due to a decline in the price of scrap steel and other metals. The company’s income increased to $423.22 million in 2015 from $381.52 million in 2014. More importantly, LKQ’s management anticipates adjusted net income in the range of $490 million t0 $520 million for 2016, which equates to adjusted diluted earnings per share in the range of $1.59 to $1.69. The stock is priced around 16-times expected earnings, significantly above the forward P/E multiple of 10.5 for the Auto Parts and Equipment industry. The hedge fund sentiment towards LKQ decreased dramatically in the fourth quarter of 2015, as the number of funds with stakes in the company declined to 27 from 35 quarter-on-quarter. Alan Fournier’s Pennant Capital Management owns 4.70 million shares of LKQ Corporation (NASDAQ:LKQ) as of December 31.