It seems that Wall Street and stock market participants in general do not entirely see where the market is heading from here. The Dow Jones Industrial Average closed 47.27 points in the green on Tuesday after losing more than 300 points a day earlier. At this moment, the market is faced with a dilemma as to whether the recent pullback is a short-term correction of the long-running bull market or represents the early stages of a longer-term downtrend. Some corporate executives have been ignoring the turmoil, volatility, and global macroeconomic concerns by heavily loading up on shares of their companies. Indeed, valuations are now more attractive than they were a few months ago, so insiders may be acquiring shares on weakness at the moment. The following article will discuss the insider buying activity at three companies: Joy Global Inc. (NYSE:JOY), New Mountain Finance Corp. (NYSE:NMFC), and Darden Restaurants Inc. (NYSE:DRI). We will attempt to find out what might have compelled insiders to be so excited about their companies’ outlook amid a broader market “correction”.
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 36 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 now get back to the three alluring companies. Paul Eric Siegert, a Director of Joy Global Inc. (NYSE:JOY), reported purchasing 25,000 shares at prices in the range of $14.77 to $14.84 earlier this week. After this acquisition, the Director now has a total stake of 68,072 shares. Mark J. Gliebe and Richard B. Loynd, two other Directors on the company’s Board, acquired shares two weeks ago as well. The former purchased 5,500 shares at a price of $19.04 per share, enlarging his stake to 10,748 shares. In the meantime, the latter bought 5,000 shares for $18.60 each and currently owns 58,526 shares. The underground mining equipment manufacturer has seen its stock drop by more than 68% since the beginning of the year, and it seems that even the heavy insider buying activity cannot stop the stock’s downfall. Joy Global’s operations and financial results have been impacted by the challenging end-market environment caused by slumping commodity prices. However, these insiders might be betting on a turnaround, which will surely happen sooner or later. Jeffrey Bersh and Michael Wartell’s Venor Capital Management is betting on a turnaround as well, given that it acquired a new 768,300-share stake in Joy Global Inc. (NYSE:JOY) during the second quarter.