On the whole, hedge funds have underperformed the market in recent years. This is no secret. To most members of the financial media, their coverage of the smart money irresponsibly focuses on this fact and nothing else. We’ve proven, though, that following the best picks of the best money managers can beat the market, quite handily in fact. We also know that consensus small-cap picks outperformed the S&P 500 index by 18 percentage points per year (see details here), but it’s worth taking this analysis a step further.
Research has proven that corporate executives, commonly called “insiders,” also know their own companies very well, and if we know where to look, this strategy can also outperform the broader market. Thus, if we parse the best hedge fund managers’ portfolios down to the stocks that receive the most support from insiders, we can form a very solid investment screening technique.
There are thousands of insider transactions reported to the SEC every year, and many publicly traded companies are involved, but only a fraction see: (1) transactions by multiple insiders, (2) buying, not selling activity, and (3) this occurring in the past 90-days.
See, consensus is king in this world, and if we can find three or more execs buying shares of their company in relatively short time period, there’s still room for retail investors to piggyback. Likewise, insider-buying activity is a much stronger indicator of future stock movement than insider selling. As the old adage goes: there are many reasons to sell a stock, but only one, very bullish reason to buy.
Now that that’s understood, we can take a dive into the equity portfolio of the iconic Dan Loeb, the manager of the multi-billion dollar hedge fund Third Point. Loeb’s 37-stock portfolio (see it in full here) contains exactly six companies that have seen insider buying activity in the past 90 days. Two of these have seen multiple execs buying shares of stock.
Weatherford International Ltd (NYSE:WFT) and Enphase Energy Inc (NASDAQ:ENPH), sitting at the No.’s 23 and 31 spots in Loeb’s portfolio, comprise the duo that has seen multiple insiders buying shares of late. A whopping total of seven different high-level execs began buying up Weatherford in November last year, and in the time since its stock has risen 45.9%.
Enphase Energy, meanwhile, has also seen multiple insiders buying shares in the past three months. Since CMO Bill Rossi began this bullish activity on Nov. 16 of last year, the semiconductor company’s stock price has boomed 112%. That’s not a typo. Now, these companies have been driven upwards by different factors related to their individual business models, but it’s worth mentioning that both stocks still trade at solid price-to-sales discounts in comparison to their industry averages.
This is just one particular situation, but it’s a great microcosm of the advantages that investors can have over their peers when using these strategies.
The remaining four stocks in Dan Loeb’s portfolio that have seen one insider buying shares in the past 90 days are: Herbalife Ltd. (NYSE:HLF), Apple Inc. (NASDAQ:AAPL), UnitedHealth Group and Vertex Pharmaceuticals. Since each insider purchase was initiated, the returns of this group have been mixed, with UnitedHealth Group coming on top.
What about Herbalife Ltd. (NYSE:HLF)?
Bill Ackman’s short campaign against Herbalife has done quite the damage to its stock, and it’s worth noting that since Dan Loeb took a bullish stance on the company in early January, it has still lost close to 7% of its value. Trading at a PEG of 0.6 and a mere 7.7 times forward earnings, shares of Herbalife are clearly cheap, though the company’s battle with Ackman persists.
Director Robert Iger’s purchases of Apple Inc. (NASDAQ:AAPL) stock, meanwhile, have not worked out the way he likely wanted, but Cupertino’s stock price is trading at undervalued multiples nearly across the board. Depressed metrics are enough for value-seekers to feel confident buying into Apple at these levels, but it’s also within the realm of possibility that income-oriented investors can be driven into the stock with a dividend boost or a strengthened repurchase plan. Notable hedge fund manager David Einhorn is pushing for more value-creation, and it appears as though Apple Inc. (NASDAQ:AAPL)’s “secret” hedge fund may be preparing for such a move.
Disclosure: I hold no positions in any of the stocks mentioned above
