As a general rule, corporate insiders buy shares in their own company when they believe the share price undervalues the earnings potential of the company’s business. Directors and executives usually buy shares during periods when their company is doing poorly, so heavy insider buying tends to disclose attractive entry points for non-insiders. Of course, there may be instances when insiders overestimate the future prospects of their companies, but past research shows that insider purchases beat broader market gauges on aggregate. Non-insiders can also capitalize on insider trading data by incorporating insider trading analysis as part of their stock selection process, but insider trading-focused strategies are suitable for long term-oriented investors only. Insider Monkey examined most Form 4 filings submitted with the SEC on Thursday and identified three companies with voluminous insider purchases.
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).
Caterpillar Witnessed Insider Buying for the First Time in Four Years
Assuming our database has not experienced any glitches in the past several years, Caterpillar Inc. (NYSE:CAT) had not witnessed any insiders purchase shares since mid-2012 until this week. Board member David L. Calhoun purchased 25,000 shares on Tuesday at prices that ranged from $77.22 to $77.66 per share, boosting his overall holding to 33,129 shares.
The manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives has seen its market value gain 14% since the beginning of 2016. Caterpillar recently reduced its sales and revenues guidance for 2016 to the range of $40 billion-to-$42 billion from the previous guidance of $40 billion-to-$44 billion despite seeing higher commodity prices and signs of improvement in construction equipment in China. The company’s global workforce is down roughly 8,600 positions since the end of the third quarter of 2015, with a number of 15 facility closures or consolidations being announced since then. However, Caterpillar plans to downsize production and workforce even further in response to lower end-user demand. Earlier this week, the construction-equipment maker revealed plans to close five U.S. plants and cut back on 820 positions.
Just several days ago, Argus Research upgraded Caterpillar to a ‘Buy’ rating from ‘Hold’, suggesting an upside potential of 20%. A strong management team and healthy balance sheet, as well as mounting signs of improvement in various parts of Caterpillar’s business stand behind the recent upgrade. The shares of Caterpillar are currently trading at a forward P/E ratio of 22.4, above the forward P/E multiple of 18.2 for the Construction Machinery & Heavy Trucks sector. Ray Carroll’s Breton Hill Capital acquired a new stake of 7,659 shares of Caterpillar Inc. (NYSE:CAT) during the March quarter.
Struggling Operator of the Chili’s Restaurant Chain Had Executive Purchase Shares
Brinker International Inc. (NYSE:EAT), whose insider buying activity has not been full of life in recent months, had one executive buy shares earlier this week. Thomas J. Edwards, Chief Financial Officer and Executive Vice President, bought 5,500 units of common stock on Wednesday at prices varying from $45.48 to $45.51 per unit, which lifted his ownership to 20,056 units.
The shares of the operator of Chili’s Grill & Bar and Maggiano’s Little Italy restaurants are down 4% year-to-date, partly owing to another bunch of disappointing financial results. The company’s Chili’s sales for the third quarter that ended March 23 increased 6.1% year-to-year due to an increase in restaurant capacity from the acquisition of a franchise of 103 Chili’s Grill & Bar in June 2015 for $106.5 million. Nonetheless, the company recorded a 4.1% decline in sales from its company-owned Chili’s locations, which marks the fourth consecutive quarter of sales declines at this restaurant chain. Brinker International owned, operated or franchised a total of 1,647 restaurants at the end of March, of which 1,596 restaurants were under the Chili’s Grill & Bar name. Meanwhile, Maggiano’s third-quarter company sales grew 2.8% year-on-year, with comparable restaurant sales increasing 0.2% year-over-year. It is important to note that the customer traffic at company-owned Chili’s locations has been on a sharp and steady decline in the past five quarters.
The shares of the operator of the Chili’s restaurant chain are changing hands at around 12.9-times expected earnings, significantly below the forward P/E multiple of 25.0 for the Restaurants sector. Cliff Asness’ AQR Capital Management had 1.27 million shares of Brinker International Inc. (NYSE:EAT) in its equity portfolio at the end of 2015.
Skyline’s CEO Purchases Shares after Short Thesis Article
Last but not least, the man in charge of Skyline Corporation (NYSEMKT:SKY) bought some shares earlier this week. Chief Executive Officer and President Richard W. Florea purchased 1,500 shares on Monday for $10.85 each and 3,500 shares on Tuesday at a weighted average price of $9.32, lifting his stake to 23,500 shares. The recent purchase comes shortly after Sonya Colberg’s Street Sweeper article put forward a short thesis on Skyline Corporation, saying that “Skyline shares took off the very day that a completely unrelated company issued big news”.
The shares of Skyline, which produces and markets manufactured housing, modular housing and park models, have advanced 150% since the beginning of 2016. Indeed, Skyline shares have joined a sharp uptrend at the beginning of March, when a news story titled “Vice’s new TV channel Viceland will launch on Sky TV in the UK in September” hit Skyline’s news feed on Yahoo Finance. However, the main issue is that Skyline and Sky TV aren’t related with one another. As Sonya Colberg says, “a United Kingdom-based TV channel is about as far removed from an Indiana-based mobile home seller as you can get”. Skyline’s shares “will fall back to about $3 per share” according to the Street Sweeper article.
However, Skyline’s CEO does not seem to agree with Sonya Colberg’s investment thesis, or he is simply trying to rebuff the claims about the impact of the Sky TV-news story. There were a mere three hedge funds from our system with stakes in the mobile home company, which amassed 10% of the company’s shares. Jeffrey Gendell’s Tontine Asset Management owned 400,405 shares of Skyline Corporation (NYSEMKT:SKY) at the end of December.