Armistice Capital Is Jumping On Pernix Therapeutics Holdings Inc (PTX)’s Bandwagon, Should You Jump Too?

According to a recent filing with the Securities and Exchange Commission, Steven Boyd‘s Armistice Capital initiated a position in Pernix Therapeutics Holdings Inc (NASDAQ:PTX) by acquiring some 3.4 million shares valued at $18.97 million, according to the current stock price. The holding amasses about 5.7% of the company’s outstanding common stock. So far this year, shares of the $252.10 million specialty pharmaceutical company have slid by more than 40%, a stark contrast to almost 22% gains for the Specialty & Generic drug manufacturing industry.

Professional money managers have been taking an increased interest in Pernix Therapeutics Holdings Inc (NASDAQ:PTX). Among the hedge funds that we track, 19 had invested a total of $124.90 million in the company at the end of March, as compared to 13 funds with $113.96 million at the end of the previous quarter. Interestingly, though total ownership jumped by nearly 50%, the aggregate capital held by the funds actually declined slightly when we factor out the appreciation of the stock during first quarter, which certainly sent some mixed signals as far as hedge funds’ sentiment.

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. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned more than 135% over the ensuing 34 months, outperforming the S&P 500 Index by nearly 80 percentage points (read the 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.

Insider trading, especially insider purchases can provide extremely useful information related to the company’s future prospects, and that is why we keep a close eye on such transactions. As far as Pernix Therapeutics Holdings Inc (NASDAQ:PTX) is concerned, Douglas Drysdale, the company’s CEO, and Sanjay Patel, who is Pernix’s CFO, bought 16,000 and 2,000 shares respectively last month, while no insider sales have been registered this year.