While our market beating small-cap strategy forms the basis for our investment platform, there’s one other proven, return-generating commodity that we also track, and that is insider trading activity. Not just any insider trading activity mind you, but specifically insider purchases from actual management of the companies in question (as opposed to large shareholder insiders).
Even more specifically, what we look for are multiple purchases over a short period of time, from more than one company insider, as opposed to just a massive purchase, or many purchases from only one insider. This kind of activity intimates that there is a widespread belief among management that the stock is undervalued or is about to rebound, since it’s inherently against their interests for the most part to invest their money in their own company, and not diversify their portfolios.
With that in mind, we’ve pinpointed three companies with heavy insider trading activity over the past few months and studied the case for why insiders are excited about the prospects of their companies, and whether you should be too. Let’s check them out, beginning with Verastem Inc (NASDAQ:VSTM).
Verastem is a $242 million market cap pharmaceutical company in the clinical-stage of drug development. They are primarily working towards a number of different drugs that essentially put up roadblocks along the signalling pathways of key cancer stem cells, inhibiting their proliferation. Their treatments are targetted specifically at mesothelioma and ovarian cancer stem cells at the moment, with one treatment in the registration-directed trial phase, and several undergoing phase 1 and 2 trials.
Since November 19, there have been 15 insider purchases at Verastem Inc (NASDAQ:VSTM), involving 10 different company insiders. The most significant of these was a massive 1.23 million share purchase by Executive Chairman Christoph Westphal on January 29, as Verastem closed an 8.34 million share offering the same day.
It’s not hard to see why insiders are so keen on the stock. Trading at just $7.11 at the close of trading on Friday, it is severely undervalued according to analysts. While Roth Capital lowered their price target on the stock on January 23, they did so to $23.00 from $29.00, which still places an upside of more than 200% on the stock. Likewise, Cantor Fitzgerald reiterated a ‘Buy’ rating and $22.00 price target on January 9, while Oppenheimer reiterated a ‘Market Outperform’ rating on January 12.
Kerr Neilson’s Platinum Asset Management is our most bullish hedge fund on Verastem Inc (NASDAQ:VSTM), with ownership of 1.7 million shares as of September 30.
Next up is Kennametal Inc. (NYSE:KMT), a supplier of tools for the engineering, aerospace, and transportation industries, which has been scooped up by 4 different insiders in 10 separate purchases since November 19. All told, insiders have bought up over 25,000 shares at a price of over $1 million. That’s a far cry from a year-and-a-half-ago, when we reported that insiders were selling Kennametal, though our funds were higher on it. As it turned out, the insiders were wrong to sell (remember, insider selling activity is less informative than buying activity), and our funds were right, as Kennametal had a very strong second half of 2013, rising over 25%.
Since those all-time highs however, things have been on a rather precipitous decline for Kennametal Inc. (NYSE:KMT), with the stock down 32.34% since the beginning of 2014. Kennametal has failed to meet revenue expectations for the past year, in the most recent case posting second quarter fiscal 2015 revenue of $676 million, well below consensus estimates of $709 million.
Unlike with Verastem Inc (NASDAQ:VSTM), analysts are not nearly as bullish on Kennametal Inc. (NYSE:KMT), despite it trading at 2-year lows. Credit Suisse reiterated a ‘Neutral’ rating on January 30, Jefferies Group reiterated a ‘Hold’ rating on January 16, while also lowering their price target to $35 from $40, and Zacks downgraded Kennametal to an ‘Underperform’ rating on January 14. So far it appears the insiders are winning, as Kennametal was up nearly 12% this past week.
John W. Rogers’ Ariel Investments was a big believer in Kennametal Inc. (NYSE:KMT), with ownership of 3.94 million shares. Institutional ownership of Kennametal is also extremely high, at 99%.
Lastly is Simmons First National Corporation (NASDAQ:SFNC), a 100-year-old bank which operates more than 100 branch and ATM outlets throughout Arkansas, Missouri, and Kansas. Since November 19, there have been 8 different insider purchases involving 7 different insiders, while there hasn’t been a single sale during that time.
Analysts are as bullish on Simmons as its insiders are, with Keefe, Bruyette, & Woods upgrading its price target to $47.00 on January 26, and Sterne Agee initiating coverage on November 24 with a ‘Buy’ rating and $52.50 price target. The latter price target is more than 25% above the current trading price of $40.47.
In its most recent earnings report, Simmons First National Corporation (NASDAQ:SFNC) reported earnings per share of $0.64, which narrowly missed estimates of $0.65 per share. On February 5 they announced a $0.23 quarterly cash dividend per share, a 4.5% increase over the cash dividend paid during the same year-ago period.
Our tracked hedge funds have traditionally had limited interest in Simmons First National Corporation (NASDAQ:SFNC), and that was also the case of September 30. Ken Gray and Steve Walsh’s Bryn Mawr Capital had the greatest investment with 45,124 shares. We’ll soon know if our hedge fund activity picked up in this stock as the insider activity did; be sure to check back for all the details.
Disclosure: None
