According to a recent article published by Bloomberg, the ratio of insiders purchasing shares to insiders selling shares over the past 30-day period is the highest that it’s been in more than four years. The article says that 699 officers and directors purchased their companies’ stock in the past 30 days, compared to 828 insiders who sold shares over the same time span. Investors and analysts believe that this occurrence represents a real sign of confidence, and rightly so. At the end of the day, it is hard to believe that insiders would invest their capital in the equity markets without anticipating a decent return from their investments. However, individual investors monitoring insider trading behavior should remember that insiders tend to have a long investment horizon (think of this practice in terms of years, not months) and can afford some short-term volatility and downturn. With this in mind, the following article will discuss the insider buying activity witnessed at several struggling companies.
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 (read more 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 begin our discussion by closely looking into the heavy insider buying at Plains GP Holdings LP (NYSE:PAGP). Chairman and Chief Executive Officer Greg L. Armstrong snapped up 1.00 million Class A shares on Wednesday at prices that ranged from $5.09 to $6.07 per share, boosting his overall holding to 1.20 million shares. Moreover, President and Chief Operating Officer Harry N. Pefanis acquired 20,000 Class A shares on the same day at a weighted average cost of $5.75 and currently owns 489,065 shares. Plains GP Holdings LP (NYSE:PAGP) is a publicly-traded entity that owns an interest in the general partner and incentive distribution rights of midstream energy master limited partnership Plains All American Pipeline L.P. (NYSE:PAA), which also witnessed heavy insider buying activity this week. Greg Armstrong, Chairman and CEO of Plains All American Pipeline as well, bought 158,066 shares of that company’s stock on Wednesday at prices varying from $15.13 to $16.50 and currently holds an ownership stake of 1.43 million shares.
Earlier this week, Credit Suisse reiterated its ‘Neutral’ rating on Plains All American Pipeline L.P. (NYSE:PAA) and cut its price target on the stock to $19 from $33, in addition to downgrading its rating on Plains GP Holdings LP (NYSE:PAGP) to ‘Neutral’ from ‘Outperform’ and trimming its price target on that stock to $8 from $14. The recent insider buying and price target cuts come after the midstream operator released its financial results for the fourth quarter and full 2015 year. The pipeline operator reported adjusted diluted earnings per share (EPS) of $0.38 on revenue of $5 billion for the fourth quarter, compared with EPS of $0.60 on revenue of $9.46 billion reported for the same period of the prior year. Ken Griffin’s Citadel Advisors LLC sold off its entire stake of 4.88 million shares of Plains GP Holdings LP (NYSE:PAGP) during the fourth quarter.