Why Are Influential Insiders Snapping Up Shares of These 3 Companies?

The volume of both insider buying and insider selling declined last week compared to the volume registered in the prior week. The decrease in insider trading activity can be explained by the ongoing fourth-quarter earnings season. However, it is also important to note that last week’s volume of insider selling has been the lowest weekly volume in the past four years or so. As a general rule, individual investors pay more attention to insider buying than insider selling, and rightly so. Corporate insiders can sell shares for a wide range of reasons, some of which are not necessarily related to their companies’ prospects, but they tend to buy stock for one straightforward reason: they believe that their companies’ stock is undervalued by the market. The Insider Monkey team pinned down three companies that witnessed several noteworthy insider purchases over the past several days, so this article will discuss those insider purchases.

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.

General Electric Company (NYSE:GE) saw an executive make a big purchase this week. Senior Vice President Alex Dimitrief reported purchasing a new stake of 65,272 shares on Monday at a cost of $28.04 per share, which is held via his 401(k) plan. The executive also holds a direct ownership stake of 17,896 shares. In April 2015, the company revealed its plans to cut the size of its financial services businesses and focus on its industrial businesses instead. Earlier this month, General Electric reported total industrial segment revenue of $108.80 billion for fiscal year 2015, compared with $109.73 billion reported for the prior year. The decrease was mainly due to a decrease in revenue generated from its oil and gas business, which suffered through declines in orders, project commencement delays, and pricing pressures. General Electric Company (NYSE:GE)’s management anticipates generating earnings per share in the range of $1.45 to $1.55 for fiscal year 2016, while analysts anticipate the company to post earnings of $1.50 per share. The latter figure yields a forward price-to-earnings multiple of 18.76, which is somewhat above the average of 15.38 for the companies included in the S&P 500 benchmark. GE’s promise and desire to return to its industrial roots might attract new investor interest, but it remains to be seen how skillful the company executes its transformation plan. The number of hedge funds tracked by Insider Monkey with positions in GE grew to 74 from 70 during the July-to-September period. Billionaire Nelson Peltz of Trian Partners was among the managers who initiated a new position in General Electric Company (NYSE:GE) during the third quarter, holding 90.57 million shares as of September 30.

Let’s head to the second page of this daily insider trading article, where we discuss the insider purchases registered at Legg Mason Inc. (NYSE:LM) and Texas Capital Bancshares Inc. (NASDAQ:TCBI).

Legg Mason Inc. (NYSE:LM) had not witnessed any insider buying since early 2013 until this week. Even more to that, the company had four different insiders purchase shares earlier this week, so let’s try to find out what might have triggered the surge in insider buying at the company. To begin with, Executive Vice President and Chief Financial Officer Peter Nachtwey snapped up 20,000 shares on Tuesday at a cost of $29.92 per share, lifting his overall holding to 109,215 shares. 5,000 shares were purchased by Director John V. Murphy, who currently owns 17,707 shares. The shares were purchased for $29.74 each. John H. Myers, a representative on the company’s Board of Directors, also bought 2,000 shares on Tuesday at a cost of $29.77 per unit and now holds a 15,207-share stake. Last but not least, Chairman, President, and Chief Executive Officer Joseph A. Sullivan acquired 25,000 shares on the same day, at $29.81 apiece, boosting his total stake to 289,989 shares.

The global asset management firm has seen its shares decline by nearly 45% over the past year, presumably because of worsening conditions in the global financial markets. The sharp decline in the company’s share price has made its P/E multiples very appealing, including a forward P/E ratio of only 9.42. As prolonged unfavorable market conditions might result in lower profitability for the company, the exploding insider buying might be perceived as a sign of strong future performance and might be intended to diminish shareholders’ concerns. 33 smart money managers from our system were invested in the company at the end of the third quarter, aggregately accumulating 27.20% of its shares. Andreas Halvorsen’s Viking Global holds a 2.47 million-share position in Legg Mason Inc. (NYSE:LM) as of September 30.

Texas Capital Bancshares Inc. (NASDAQ:TCBI) had one of its most influential insiders purchase shares last week. Chief Executive Officer and President C. Keith Cargill bought a 10,000 share-block on Friday at prices that ranged from $33.43 to $33.67 per share and currently owns a stake of 51,383 units of common stock. The move comes after Texas Capital released its earnings report for fiscal year 2015 last Wednesday. The company reported net income of $144.85 million for the year, up from $136.35 million reported for 2014. Texas Capital’s return on average common equity (ROE) totaled 9.65% in 2015, down from 11.31% reported for 2014. At the same time, the company’s return on average assets (ROA) declined to 0.79% from 1.05%. It is also important to mention the company’s market risk associated with its energy lending activities. Texas Capital has experienced a steady increase in non-performing assets over the past several quarters, which was mainly related to the company’s energy loans.

Texas Capital’s stock has lost 17% over the past year and trades at very attractive P/E multiples at the moment, which includes a forward P/E ratio of 8.63. A total of 15 hedge funds tracked by our team had positions in the company at the end of the July-to-September period, amassing 9.20% of its outstanding common stock. Ken Griffin’s Citadel Advisors LLC reported ownership of 1.10 million shares of Texas Capital Bancshares Inc. (NASDAQ:TCBI) through its 13F for the third quarter.

Disclosure: None