Last week’s overall dollar volume of insider buying was even lower than the extremely low volume registered in the previous week. Meanwhile, the dollar volume of insider selling increased week-over-weak, which sent the ratio of insider selling over insider buying through the roof. This rather worrisome insider trading behavior should not serve as a major reason for concern among investors considering the thickness of the ongoing first-quarter earnings season. But why would the dollar volume of insider selling be 74 times higher than the volume of insider buying when most companies have blackout periods in place (these blackout periods restrict insiders from trading securities around earnings announcements)? The primary explanation is that a high portion of insider selling is conducted under pre-arranged trading plans, so the overall volume of insider sales on the open market should be close to the volume of insider buying. Having this in mind, the following article will discuss the insider buying recently witnessed at three companies.
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 imitating 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 CEO of This Airline Bought $1 Million Worth of Stock Last Week
Let’s begin our discussion by looking into the insider buying at United Continental Holdings Inc. (NYSE:UAL), which had its top executive buy a sizable block of shares last week. Chief Executive Officer and President Oscar Munoz purchased 19,800 shares on Friday at prices that ranged from $50.50 to $50.55 per share, boosting his overall holding to 163,675 shares. The $1 million-transaction has received a lot of attention from the media, as the transaction is one of the most voluminous insider purchases at the company since early 2014.
The CEO’s purchase comes after the airline revealed lower-than-expected outlook on Revenue per Available Seat Mile (RASM) for the current quarter. Soon after the release of the first-quarter earnings report, analysts at Sterne Agee downgraded United Continental Holdings Inc. (NYSE:UAL) to ‘Neutral’ from ‘Buy’ and lowered the price target on the stock to $56 from $70, saying that “narrowing the margin gap with its Big 3 peers may take longer than anticipated, in our view, with many UAL specific problems not easy to fix quickly”. Meanwhile, analysts at Credit Suisse reiterated their ‘Outperform’ rating on the stock, citing limited downside. Just recently, the airline ended a potentially detrimental proxy fight by reaching an agreement with Brad Gerstner’s Altimeter Capital Management LP and Paul Reeder and Edward Shapiro’s PAR Capital Management LP, both major shareholders of United Continental, under which the size of the Board was increased to 17 seats and Mr. Shapiro and Barnaby Harford, an Altimeter-designated director, were appointed to the Board (read more details).
Shares of United Continental are down 11% year-to-date, partly owing to a 10%-drop in the past five trading sessions. The stock is priced at around 5.9-times expected earnings, significantly below the forward P/E multiple of 17.8 for the S&P 500. David Keidan’s Buckingham Capital Management trimmed its stake in United Continental Holdings Inc. (NYSE:UAL) by 45% during the March quarter to 45,345 shares.