As a general rule, insider buying usually indicates that directors and executives of public companies find shares of their firms to be undervalued relative to the broader market or industry peers. When CEOs or other top-tier executives use their own wealth to buy shares of their companies on the open market, they are explicitly voicing their belief that those shares will appreciate in value over time. Past research suggests that insider purchases, particularly those made by top-level executives, tend to beat broader market benchmarks by a wide margin. For that reason, the following article will lay out a list of three companies that had their most influential executives buy shares earlier this week, all of which were filed with the SEC on Wednesday.
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).
This Multiscreen Video Company Had Two Insiders Buy Shares
Let’s begin our discussion by having a look into the insider buying activity at SeaChange International (NASDAQ:SEAC), which had two influential insiders buy sizable blocks of shares this week. To start with, freshly-appointed Chief Executive Officer Edward Terino, who served as Chief Operating Officer from June 2015 until his recent appointment as CEO, purchased 40,000 shares on Tuesday at prices that ranged from $3.79 to $3.87 per share, boosting his overall holding to 230,475 shares. Earlier this month, the multiscreen video company announced the appointment of the software veteran as CEO after the company’s Board of Directors terminated the employment of former CEO, Jay Samit. Moreover, Steven C. Craddock, Chairman of the Board, snapped up 25,000 units of common stock on Tuesday at prices varying from $3.80 to $3.98 per share, which lifted his ownership to 84,233 units.
The shares of SeaChange plunged by more than 10% on Friday after the company released a disappointing earnings report for the fourth quarter for fiscal year 2016. The company’s total revenue for fiscal year 2016 that ended January 31 totaled $106.99 million, down from $115.44 million in fiscal year 2015, and from $146.32 million in fiscal year 2014. SeaChange’s product revenue, which accounted for 20% of total revenue in fiscal year 2016, fell by 31% year-over-year to $21.90 million. The significant decrease in product revenue was mainly driven by a decline in the company’s legacy advertising insertion products, a decrease in video-on-demand (VOD) streamer products, as well as lower Adrenalin products in Europe. Meanwhile, service revenue grew by 1% year-over-year due to higher gateway service revenue, which was partially offset by lower VOD streamer support revenue. The company’s bottom-line figure has been worsening alongside its declining revenue in recent years, with fiscal year 2016 income reaching a net loss of $47.70 million, far worse than the $27.48 million loss in fiscal year 2015 and the $3.03 million loss in fiscal year 2014. Nonetheless, SeaChange’s management anticipates returning to revenue growth and profitability in fiscal year 2017, guiding for revenue of $110 million-to-$120 million and non-GAAP operating income per diluted share of $0.05-to-$0.15. Shares of SeaChange are down by 40% since the beginning of 2016.
There were ten hedge funds in our system with stakes in the multiscreen video company at the end of December, which amassed almost 22% of the company’s outstanding shares. John W. Rogers’ Ariel Investments reported ownership of 2.76 million shares of SeaChange International (NASDAQ:SEAC) through the round of 13Fs filings for the fourth quarter.