These 3 Battered Stocks are Being Bought Up by Insiders; Are They Set to Rebound?

It is my belief that insider trading behavior should play an important role in the stock analysis and selection process of individual investors. Truth be told, corporate insiders possess a deep knowledge base concerning their companies’ operations and prospects. Moreover, these highly-informed individuals tend to act as contrarian investors, going against the trends concerning their company’s stocks. Generally, stock market participants pay more attention to insider buying than insider selling, and rightly so. Although insiders can sell shares for various reasons unrelated to their companies’ current performance or future prospects, they tend to buy stock for one simple reason: they believe their companies’ stock is undervalued. Having this in mind, the following article discusses the recent insider buying reported at three companies and the potential reasons that might have pushed those insiders to buy more shares.

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.

Anadarko Petroleum Corporation (NYSE:APC) had one of its insiders make a big purchase last week. Director Peter J. Fluor bought 25,000 units of common stock on Thursday at prices that ranged between $41.14 per share and $41.24 per share. Following this sizable purchase, the Director holds an ownership stake of 104,758 shares. Anadarko Petroleum Corporation (NYSE:APC), one of the largest independent exploration and production companies in the world, has lost half of its market capitalization over the past year and its shares keep falling in tandem with crude oil prices. The company reported sales revenue of $7.45 billion for the nine months that ended September 30, compared to $12.95 billion reported for the same period of the prior year. Although Anadarko Petroleum’s management continued to improve the company’s cost structure over the course of 2015 through improved operational efficiencies and reduced service costs, several financial hubs became more pessimistic about the company’s future performance. Just recently, Deutsche Bank downgraded the stock to ‘Hold’ from ‘Buy’ and lowered its price target to $60 from $85, suggesting that the company “isn’t particularly defensive” amid a depressed crude oil market. A total of 70 hedgies tracked by Insider Monkey were invested in the company at the end of the third quarter, accumulating 11% of its outstanding common stock. Ken Griffin’s Citadel Advisors LLC upped its position in Anadarko Petroleum Corporation (NYSE:APC) by 29% during the third quarter to 9.0 million shares.

The following two pages of this daily insider trading article reveal the insider purchases reported at Mattress Firm Holding Corp (NASDAQ:MFRM) and Xcerra Corp (NASDAQ:XCRA).

Mattress Firm Holding Corp (NASDAQ:MFRM) is another company that saw one of its insiders purchase a relatively sizable block of shares last week. Director Joe Fortunato snapped up a 5,000-share block last Friday at a price tag of $41.21 apiece, lifting his overall holding to 12,215 shares. As the name suggests, Mattress Firm engages in the retail sale of mattresses and bedding-related products and it appears that there were no significant economic factors that greatly impacted the company’s stock performance in 2015. Nonetheless, the shares of the company are down by 29% over the past year, presumably because investors anticipated stronger financial performance last year.

Mattress Firm reported net sales of $1.92 billion for the 39 weeks that ended November 3, up by 59.2% year-over-year. This substantial top-line growth was mainly achieved due to an increase in the number of operated stores as well as an increase in comparable-store sales. Meanwhile, the company’s bottom-line figure for the 39-week period reached $51.2 million, up from $37.6 million reported a year ago. It should also be mentioned that the stock trades at a rather attractive forward price-to-earnings ratio of 14.21, which compares favorably with the ratio of 15.75 for the S&P 500 benchmark. According to a 13G filing submitted in December, Alan Fournier’s Pennant Capital Management owns 2.72 million shares of Mattress Firm Holding Corp (NASDAQ:MFRM), representing 7.7% of its outstanding shares.

Last but not least, Xcerra Corp (NASDAQ:XCRA) had one of its executives purchase shares earlier this year. Mark J. Gallenberger, Senior Vice President, Chief Operating Officer and Chief Financial Officer, reported purchasing 15,000 shares on Friday at a weighted average price of $5.20, boosting his total stake to 533,028 shares. The global provider of test and handling capital equipment, interface products, and test fixtures has seen its shares decline by 34% since the middle of January 2015. The demand for the company’s capital equipment and consumable products, which is highly dependent on the growth of the semiconductor and electronics industries, has been slowing over the past several quarters.

The company reported net sales of $78.40 million for the three-month period that ended October 31, down from $116.22 million reported for the same period a year ago. The stock trades at a forward P/E ratio of 14.91, which could explain the executive’s decision to stockpile more shares at the moment. Nonetheless, this valuation metric reflects analysts’ earnings expectations, which might not come in line with the company’s actual results. At the end of November, Xcerra announced the completion of the sale of its semiconductor test interface board business for roughly $23 million. A total of 19 hedge funds from our database had stakes in the company at the end of the September quarter, which amassed 14.20% of its outstanding shares. Royce & Associates, founded by Chuck Royce, reported owning 2.97 million shares of Xcerra Corp (NASDAQ:XCRA) through its 13F for the third quarter.

Disclosure: None