Savvy investors would be wise to adjust their fundamental stock analysis by incorporating the tracking of insider trading activity as well, in order to get a feeling of the future prospects of relevant companies. Due to the fact that insiders are prohibited from “short-swing” transactions (buying and selling shares within a six-month period), they might buy shares when confident about the long-term performance of their companies, and sell shares when they see a gloomy outlook in the future (although selling shares can be done for a variety of reasons). In the following article we’ll be discussing three companies that have seen unusual clusters of insider trading recently. Specifically, KapStone Paper and Packaging Corporation (NYSE:KS) and Agree Realty Corporation (NYSE:ADC) witnessed notable insider buying activity yesterday, whereas Morningstar Inc. (NASDAQ:MORN) had a large volume of insider selling on the same day.
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 32 months, outperforming the S&P 500 Index by 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 looking into the insider activity at KapStone Paper and Packaging Corporation (NYSE:KS), a company that manufactures and sells containerboards, corrugated products, and specialty paper products. Roger W. Stone, Chairman of the Board and Chief Executive Officer since the company’s inception in 2005, reported purchasing 100,000 shares on August 24 at a price of $20.91 each, adding to a stake that now totals nearly 3.20 million shares. The shares of KapStone have embarked on a steady downtrend since the end of February, losing nearly 30% year-to-date. It might be the case that the CEO is attempting to stem the free-fall of the company’s stock by assuring the market that the shares are undervalued. But it might also be the case that Roger Stone truly believes that the company is set for a rebound or is worth far more than the market is giving it credit for. KapStone recently completed the purchase of Victory Packaging/Golden State Container, a national distributor of all types of packaging. Following the completion of this deal, the team of KapStone, led by Stone, believes that the company is well-positioned for future growth, which might suggest the stock represents a good buy-low candidate. Youlia Miteva’s Proxima Capital Management added a new 1.01 million-share position in KapStone Paper and Packaging Corporation (NYSE:KS) to its portfolio during the second quarter.
Moving on to the next company that had strong insider buying activity yesterday, Agree Realty Corporation (NYSE:ADC), an integrated real estate investment trust (REIT), which saw two different insiders buy shares. William S. Rubenfaer, an Independent Director at Agree Realty, bought 4,000 shares through two transactions at average prices of $28.86 and $28.87 per transaction. Following the transactions, the insider currently owns 14,000 shares. Richard Agree, Executive Chairman of the company’s Board of Directors, made three purchases of 5,000 shares at prices ranging from $28.48 to $29.01, boosting his stake to 431,358 shares. The REIT recently announced its financial results for the second quarter, posting total rental revenue of $16.11 million, up by 35% year-over-year. Meanwhile, the company’s net income came in at $10.26 million or $0.59 per share, compared to $2.65 million or $0.18 per share reported in the same quarter a year ago. Despite delivering a seemingly strong financial performance, the shares of the REIT have dropped by almost 9% since the beginning of the year, which might stand behind the corporate insiders’ purchases. Israel Englander’s Millennium Management is one of the largest shareholders of Agree Realty Corporation (NYSE:ADC) within our database, holding a 170,989 share-stake at the end of June.
We can now turn our full attention to Morningstar Inc. (NASDAQ:MORN), which registered a high volume of insider selling yesterday. Bevin Desmond, who is the President of International Operations and Global Human Resources for Morningstar, sold 5,000 shares through three transactions on August 24, at an average price of $78.29, trimming her stake to 29,375 shares. Bevin Desmond has sold even more shares over the last few weeks, which might suggest that the price level of over $85 is short-lived for the stock. The shares of Morningstar are up by 22.38% year-to-date, partly thanks to the company’s strong financial performance of late. Morningstar, a leading provider of independent investment research, reported net operating income of $49.7 million for the second quarter, compared to a net operating loss of $24.8 million posted a year ago. The company recently announced its plans to launch the industry’s first environmental, social, and governance (ESG) scores for global mutual and exchange-traded funds by the end of the year. It’s worth mentioning that Julius Baer, a Swiss private banking firm, will be the first to license the ESG scores. From the massive pool of hedge funds and other investors that we track, Chuck Royce’s Royce & Associates represents the largest equity holder in Morningstar Inc. (NASDAQ:MORN), owning 1.59 million shares.
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