Time to Go Long These Three Stocks? Insider Buying Metric Suggests So; Valeant Pharmaceuticals Intl Inc. (VRX) Among Them

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All major U.S. stock indexes closed sharply higher on Thursday, thanks to the European Central Bank’s hints at more economic stimulus measures at its December meeting and to a handful of fresh earnings reports. The Dow Jones Industrial Average gained 320.55 points or 1.87% yesterday, formally buzzing off the correction territory. The Dow closed at 17,489.16 on Thursday, which also marks its highest close since mid-August. Meanwhile, the S&P 500 advanced by 3.57 points or 1.66%, mainly dragged by the struggling healthcare stocks. Leaving the statistics aside, some corporate insiders have been purchasing more stock lately, which could point to the fact that they expect their companies’ stock to appreciate in the upcoming future. Generally, insider buying is quite straightforward to interpret, as insiders tend to buy shares expecting them to go up in price. Even so, there might be more sophisticated reasons on why insiders buy stock, so one should closely examine each insider’s move prior to jumping onto the market. Having this in mind, the following article will discuss the insider buying activity at three companies, one of which represents a well-known struggling pharma company.

Gilead GILD pharmacist store examing pharmaceutical stocks medical

kurhan / shutterstock.com

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 more than 102% over the ensuing 3 years, outperforming the S&P 500 Index by more than 53 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 kick off our discussion by looking into the insider buying activity at pharmaceutical giant Valeant Pharmaceuticals Intl Inc. (NYSE:VRX). Director Ronald H. Farmer purchased 1,500 shares on the Toronto Stock Exchange this Wednesday at prices of CAD$193 (~USD$147.75) and CAD$158.79 (~USD$121.56). Following the transaction, the Director owns 15,532 shares. The shares of the pharma company have lost nearly 50% over the past month, as a result of the serious pressure over drug pricing. Earlier this week, well-known short-seller Citron Research accused Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) of using specialty pharmacies to puff up revenue, which put even more downward pressure on the stock (see details). The company’s management denied the allegations made, but could not put a halt to the massive sell-off of its shares. However, the pharma company has the ability to alleviate all the concerns around the company in a conference call on Monday, which is set to lay out facts regarding the allegations made by Citron Research. Bill Ackman’s Pershing Square was the top shareholder of Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) within our database at the end of the second quarter, holding 19.47 million shares.

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The next page will discuss the insider buying activity at other two companies.

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