The depressed crude oil prices and fresh worries about China’s decelerating economy have put significant weight on U.S. equities in the first trading sessions of 2016. The Dow Jones Industrial Average dropped 252.15 points on Wednesday, extending its downtrend that kicked off in late December. The Chicago Board Options Exchange Volatility Index, simply known as the VIX, has jumped above 20, which suggests that there is a lot of uncertainty and concern in the stock market at the moment. Even so, certain insiders ignored the increased volatility in equity markets, and started piling up more shares of their companies. Of course, this type of activity amid increased concerns about the direction of U.S. equities should be paid double attention, as it suggests insiders’ confidence in their companies’ future prospects despite a global economic slowdown and low crude oil prices. The team of analysts at Insider Monkey pinned down three companies that reported noteworthy insider buying lately, so this article merely focuses on discussing the insider trading behavior witnessed at those companies and their recent performance.
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 102% over the ensuing 38 months, outperforming the S&P 500 Index by more than 53 percentage points (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 start off by analyzing the insider trading activity reported at Devon Energy Corp (NYSE:DVN). Director Barbara M. Baumann purchased 8,200 shares on Wednesday at a weighted average price of $30.44, lifting her overall holding to 21,320 shares. This independent energy company that mainly engages in the exploration, development and production of oil, natural gas and NGLs has seen its shares drop 49% over the past year and may keep going down in the near-term. The depressed crude oil prices and NGL prices have greatly impacted the company’s financial performance throughout 2015. Devon Energy Corp (NYSE:DVN) reported a net loss of $9.92 billion for the nine months ended September 30, as compared to net earnings of $2.02 billion posted for the same period a year earlier. Roughly half of the company’s oil and gas production in 2015 was hedged at $90 per barrel and $4 per Mcf, correspondingly. Those hedging contracts generated $1.7 billion of cash flow in the first nine months of last year. However, the sustained decline in crude oil prices and the expiration of a significant portion of Devon’s hedges in the fourth quarter of 2015 will most likely put even more downward pressure on the company’s financials. The number of hedge funds from our database with positions in the company dropped to 48 from 56 during the third quarter. Israel Englander’s Millennium Management reported owning 5.85 million shares of Devon Energy Corp (NYSE:DVN) through its 13F filing for the third quarter.
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The second page of this insider trading article discusses the insider buys reported at Bob Evans Farms Inc. (NASDAQ:BOBE) and Liberty Tax Inc. (NASDAQ:TAX).