In this article, we will take a detailed look at the 10 Undervalued Stocks with Latest Insider Purchases. For a quick overview of such stocks, read our article 5 Undervalued Stocks with Latest Insider Purchases.
Tracking insider trading has proven to be an interesting and, in many cases, a profitable activity over the past several decades. Academic and industry research has shown that when a stock is seeing heavy insider buying, more often than not it gains value in the long term. Stock valuations also play a key role in insider trading activities. In a research paper titled Are Insider Trades Informative? Josef Lakonishok from the University of Illinois at Urbana-Champaign and NBER and Inmoo Lee from Korea Advanced Institute of Science and Technology talked about some research which proves that insiders are “better informed” about their company prospects and they buy stocks when they are cheap. However, the researchers found that the market is slow to process and react to insider trading signals. They cited another research paper titled “Market Underreaction to Open Market Share Repurchases” which shows that companies that announce open market share repurchases have “prolonged positive abnormal returns.” This study said that one of the “main motivations for repurchases seems to be that insiders perceive the company’s stock as being cheap.”
Mimicking Insider Trades is Profitable
Tracking insider trading activity is also useful in international markets. In a 2008 research paper titled Some Insiders Are Indeed Smart Investors, researchers created a portfolio of stocks based on insider trades in the UK for the period between 1994 to 2006. This long-only strategy showed to have produced “economically and statistically significant return.” The researchers also said that tracking insider trades can be used as a “satellite strategy” to increase the returns of a “typical quant investment portfolio.”
How Can Outsiders Make the Best Use of Insider Trading Data?
While keeping track of insider trading activity, it’s also important to not allow yourself to dwell on irrelevant and “noisy” data. Sometimes insider buying transactions are not important at all. Sometimes they provide invaluable information. How can outsiders make the best use of publicly available insider trading data? One approach could be to focus on clean data and focus only on major transactions that were driven by a purpose. For example, in the 2008 research paper we mentioned above, all insider buying transactions without a comment from the insider on the purpose/explanation of the transaction having transaction value lower than £30,000 were excluded. The researchers also tried to remove low-quality data when it comes to news reporting following insider purchases. For that they divided news into three broader categories: executive changes, M&A news and business event news.
After cleaning insider trading data, an analysis was performed, which yielded interesting results, showing that insider buying and selling is indeed worth your attention:
“In particular, immediately after the directors’ purchase announcement, we find that shares tend to outperform the market by 0.7%. We also find that stocks outperform by 1.2% between days 1 to 60 and by 2.9% between days 1 and 120. In the case of directors’ sales, our results indicate that the stocks remain directionless over the following 120 days, i.e. stocks outperform by –0.2%. Almost 60% of purchases have a positive return, while just as many directors’ sales subsequently underperform as outperform. Insiders, purchase shares on short-term weakness (the company typically underperforms the market by 1.5% over the prior 30 days) and sell on strength (+3.5% over prior 30 days).”
High-Conviction Insider Buys Post Strong Returns
The most important part of this study talks about using insider trading data to your advantage to beat the market. For that the research paper emphasized that only high-conviction picks of directors and executives should be taken into account. This strategy was back-tested on all directors’ purchases from January 19953 to May 2006 for the constituents of the FTSE 350.
“The buy portfolio yields an average annual return of 23.5% and has an annualised information ratio of 1.15. The strategy produces very persistent returns outperforming the equally weighted universe in 64% of the months. Stocks in the ‘Medium-to-High conviction’ basket also do very well. They generate an average annual return of 20.4% with a volatility of 23.7%.”
Photo by jason briscoe on Unsplash
Methodology
For this article we first used a stock screener to identify the stocks which have seen insider buying activity over the past few weeks. From these stocks we picked 10 stocks with PE ratios less than 20. Why do we pay attention to hedge fund and insider activity? Insider Monkey’s monthly newsletter and portfolio that focuses on activist hedge funds, insider trading and stock picks from hedge fund investor newsletters and conferences returned 199.2% between March 2017 and March 12, 2024 and outperformed the S&P 500 ETFs’ 144.9% gain by more than 54 percentage points.
10. Westlake Chemical Partners LP (NYSE:WLKP)
Number of Hedge Fund Investors: 2
Petrochemicals and polymers company Westlake Chemical Partners LP (NYSE:WLKP) ranks 10th in our list of the undervalued stocks insiders are buying. The stock has a PE ratio of 14.4 as of April 3 and it’s up 2.2% year to date. Andrew Kenner, Senior Vice President, Olefin Material & Corporate Procurement, on March 28 bought 5,000 shares of Westlake Chemical Partners LP (NYSE:WLKP) at $22.23 per share. The total value of this insider purchase was $111,150. Since then the stock price is down about 5%.
9. Kingsway Financial Services Inc. (NYSE:KFS)
Number of Hedge Fund Investors: 2
Kingsway Financial Services Inc. (NYSE:KFS) President and CEO John Taylor Maloney Fitzgerald on April 1 bought 302 shares of Kingsway Financial Services Inc. (NYSE:KFS) at $8.27 per share. Since this transaction the stock is up 9%. Kingsway Financial Services Inc.’s (NYSE:KFS) CFO Kent A Hansen also bought 189 shares of Kingsway Financial Services Inc. (NYSE:KFS) on April 1 at $8.27 per share.
As of the end of the fourth quarter of 2023, two hedge funds had stakes in Kingsway Financial Services Inc. (NYSE:KFS).
Alphyn Capital Management made the following comment about Kingsway Financial Services Inc. (NYSE:KFS) in its Q3 2023 investor letter:
“I added a new position to our portfolio: Kingsway Financial Services Inc. (NYSE:KFS). KFS is a holding company with two primary segments: a warranty business and a search fund accelerator business, which I’ll discuss in more detail below.
KFS has a checkered history, as evidenced by its volatile stock price. The company’s roots lie in the warranty business, which provides extended warranty services covering repair or replacement costs for vehicle service agreements, HVAC systems, standby generators, commercial LED lighting, and refrigerators. This business experienced a rapid growth of 60% per year, accompanied by a soaring stock price. However, lax underwriting standards were exposed during 2006-2008, leading to catastrophic losses and a staggering $1 billion in net operating losses (NOLs). Activist investors intervened and brought in new management. It took two attempts to stabilize the company. The first CEO attempted to build a merchant banking-type business, but instead of creating a mini-Berkshire Hathaway-style conglomerate, he ended up with an opaque, conflict-ridden business with poorly performing investments…” (Click here to read the full text)
8. Summit Financial Group Inc (NASDAQ:SMMF)
Number of Hedge Fund Investors: 4
Summit Financial Group Inc (NASDAQ:SMMF) is one of the undervalued stocks that saw recent insider purchases. On March 19, James P. Geary, a director at Summit Financial Group Inc’s (NASDAQ:SMMF) board, bought 896 shares of Summit Financial Group Inc (NASDAQ:SMMF) at $25.58 per share. Since then the stock has gained about 6.8%.
As of the end of the fourth quarter of 2023, 23 hedge funds out of the 933 funds tracked by Insider Monkey had stakes in Summit Financial Group Inc (NASDAQ:SMMF). The biggest stake in Summit Financial Group Inc (NASDAQ:SMMF) is owned by Phil Stone’s Fourthstone LLC which owns a $7.2 million stake in Summit Financial Group Inc (NASDAQ:SMMF).
7. Epsilon Energy Ltd (NASDAQ:EPSN)
Number of Hedge Fund Investors: 6
Texas-based energy company Epsilon Energy Ltd (NASDAQ:EPSN) ranks seventh in our list of the undervalued stocks with insider buying. Epsilon Energy Ltd’s (NASDAQ:EPSN) CEO Jason Stabell on March 26 bought 36,466 shares of Epsilon Energy Ltd (NASDAQ:EPSN) at $5.25. Since then the stock has gained about 4.7%.
6. Mid Penn Bankcorp Inc (NASDAQ:MPB)
Number of Hedge Fund Investors: 6
Financial services company Mid Penn Bankcorp Inc (NASDAQ:MPB) has seen heavy insider buying activity recently as several of its board directors snapped up company shares. Albert J. Evans, a board member at the bank, bought 500 shares of Mid Penn Bankcorp Inc (NASDAQ:MPB) at $20.01 per share on March 28. Another director at Mid Penn Bankcorp Inc’s (NASDAQ:MPB) board, Matthew G. DeSoto bought 400 shares of Mid Penn Bankcorp Inc (NASDAQ:MPB) at $20.01 per share. This transaction also took place on March 28. Since then, Mid Penn Bankcorp Inc (NASDAQ:MPB) shares have declined about 1.4%. Robert Grubic and Brian Hudson, two directors at Mid Penn Bankcorp Inc’s (NASDAQ:MPB) board, on March 28 bought 250 shares of the bank each at $20.01 per share.
Click to continue reading and see 5 Undervalued Stocks with Latest Insider Purchases.
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Disclosure. None. 10 Undervalued Stocks with Latest Insider Purchases was initially published on Insider Monkey.