At Insider Monkey we track both activity by investors and other large investors as well as insider purchases and sales. Because a company insider’s future earnings are often tied to the business they work for, investing a larger portion of their wealth in the same business reduces their diversification. Therefore, it is not rational for an insider to buy additional shares of a company’s stock unless they are confident in its future prospects. This theoretical argument for why insider purchases are bullish signs (insider sales are less of a signal as an insider may simply be trying to diversify) is backed up by research (learn about academic studies on insider trading). Here are some large insider buys that have taken place recently:
A number of insiders at Molycorp bought stock in the company. Long-time private investor Resource Capital, controlled by Ross Bhappu, purchased 2.5 million shares in August. The company’s President and CEO bought an additional 50,000 shares, and other insiders bought as well. According to the studies of insider trading that we have reviewed, consensus buying among insiders is a particularly strong bullish signal. Molycorp has been hit hard by decreases in price of rare earth compounds: it increased its revenue slightly last quarter compared to the same period in 2011 on higher volumes, but higher costs caused its earnings to drop. Despite its troubles Molycorp is also seeing attention from hedge funds. Tiger Cubs Philippe Laffont and John Griffin were investors in the stock at the end of the June; Laffont’s Coatue Management reported 1.1 million shares in its portfolio while Griffin’s Blue Ridge Capital initiated a position of 2.2 million shares. Molycorp trades at 16 times forward earnings estimates, so is well priced if rare earth prices recover.
Board member Scott Mercer of Polycom (NASDAQ:PLCM), a $1.9 billion market cap provider of unified communications systems such as teleconferencing and voice conferencing, purchased 25,000 shares at an average price of $9.51 on August 23rd. Polycom’s stock has fallen 36% so far in 2012 (in its most recent quarter earnings were down 77% from a year ago), and Mercer likely thinks that the company is a good value at that price. Hedge funds are beginning to sniff around Polycom as well, with Lee Ainslie’s Maverick Capital initiating a position of 5.8 million shares during the second quarter. The stock has popped since Mercer’s purchase but about flat from the end of June, so investors can at least get in at roughly the same price where the hedge funds found it a buy. Polycom trades at 20 times trailing earnings, with analyst growth expectations bringing the forward P/E down to 15.
Midstates Petroleum Company (NYSE:MPO), an oil and gas exploration and production company headquartered in Texas, saw its President and CEO John Crum directly purchase 25,000 shares at an average price of $8.04. With the stock price currently at $8.14, investors could buy it at about the same price. Midstates’s geographic focus is on onshore drilling in central Louisiana, and the majority of its production in terms of barrels of oil equivalent is oil and natural gas liquids. In 2012 the company has announced plans to drill 67 new wells. Like Polycom, the stock has not done well this year: it IPO’d in April and has since fallen 46%. Again, the CEO likely decided that the price was low enough to reduce his diversification and buy additional shares of the stock, expressing confidence in the company’s operations. Wall Street analysts expect a large increase in earnings next year as Midstates builds scale and increases production, resulting in a forward price-to-earnings ratio of 11.
