ConocoPhillips (COP) and 2 Small-Cap Companies Are Targets of Insider Buying

U.S. equities closed sharply in the green on Friday, marking the fourth consecutive week of strong gains for the major U.S stock indexes. The S&P 500 Index has advanced by 8.4% over the past month, while the Dow Jones Industrial Average is up by 7.8%. In fact, the 8.4% four-week gain for the S&P 500 represents its strongest four-week rally in percentage terms since late 2011. It is also worth pointing out that both the S&P 500 benchmark and the Dow crossed their 200-day moving averages on Friday, which is great news for both technically-oriented and other investors. Surprisingly, the dollar volume of insider buying continues to remain at relatively high levels despite the recent rally. As a matter of fact, last week’s volume of insider buying increased relative to the volume registered during the week prior, whereas the volume of insider selling dropped slightly week-over-week. This is probably because U.S equities were swinging around wildly throughout the first trading days of the past week, failing to extend the previous weeks’ rally up until Friday’s strong session. The Insider Monkey team processed dozens of Form 4 filings submitted with the SEC last week and identified three companies with noteworthy insider purchases, which we’ll look at in this article.

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 imitating the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012 (read more details here).

Let’s begin our insider trading investigation by taking an in-depth look at the insider buying activity witnessed at Malvern Bancorp Inc. (NASDAQ:MLVF). To start with, Senior Vice President and Chief Risk Officer Woolworth William III purchased a new stake of 1,000 shares on Wednesday for $16.21 apiece, which is held by an individual retirement account (IRA). The CRO also holds a direct ownership stake of 1,071 shares. On March 4, Chief Executive Officer and President Anthony C. Weagley bought 2,500 shares for exactly $16.00 each and currently owns 29,706 shares. Last but not least, Director Howard A. Kent snapped up 44,100 shares on the same day at a weighted average price of $16.00, of which 10,000 shares were purchased by or for his spouse. The remaining shares are held indirectly via joint ownership. The Director also owns 26,140 shares directly.

Malvern Bancorp Inc. (NASDAQ:MLVF) is the holding company for Malvern Federal Savings Bank, which primarily focuses its lending activities on retail clients, commercial lending to small- and medium-sized businesses, real estate developers and high net worth individuals. Although the recent insider buying activity at the federally chartered stock savings bank is not overly voluminous, the cluster of insider buying may be suggesting that the company’s shares are undervalued by the market. Shares of Malvern Bancorp have lost 7% since the beginning of 2016, though they are up by 22% over the past 12 months. Just recently, the company released its financial results for the first quarter of fiscal year 2016 that ended December 31, posting net income of $1.3 million for the quarter, a big jump from the net income of $321,000 reported for the same period of the prior year. The company’s net interest margin climbed by 11 basis points year-over-year to 2.72% during the three-month period. Meanwhile, the stock is priced at 14.73-times expected earnings, above the forward P/E multiple of 12.70 for the Financials sector.

The next pages of this article reveal the insider buying activity registered at Lumos Networks Corp (NASDAQ:LMOS) and ConocoPhillips (NYSE:COP).

Lumos Networks Corp (NASDAQ:LMOS) had one influential member of its Board of Directors buy shares last week, so let’s figure out whether the insider made a reasonable move or not. Chairman Robert E. Guth purchased 10,000 units of common stock on Wednesday at prices that ranged from $12.38 to $12.50 per share, which lifted his overall holding to 59,110 shares.

Lumos Networks is a fiber-based bandwidth infrastructure and service provider in the Mid-Atlantic region. The company primarily offers services to carrier and enterprise customers, which include healthcare providers, local government agencies, financial institutions, educational institutions, and other entities. Shares of Lumos are down by 19% over the past 52 weeks, but are up by 12% in 2016. The company’s data segment accounted for 56% of total revenue in 2015, totaling $114.31 million, which was up from $106.64 million reported for 2014. The 7.2% revenue growth in this segment was mainly driven by increases in long-term contracts with U.S wireless carriers, the addition of second tenants to existing connected cell towers, bandwidth upgrades, new enterprise contracts, and higher rates of renewal with existing customers. This segment represents the company’s primary growth opportunity and the main pillar of its strategy, so the recent growth experienced in this segment is a promising sign for investors. Lumos Networks’ enterprise data, transport and Fiber to the Cell site (FTTC) product and service groups, which actually comprise the whole data segment, are associated with higher gross margins than other product lines. The company faces high competition from incumbent local exchange carriers (ILECs), broadband services providers, incumbent cable operators, and fiber providers. Therefore, the fast-toughening competition could result in pricing pressures, lower customers, reduced operating margins and lower market share. There were ten hedge funds in our system invested in Lumos at the end of 2015, with them owning 19.30% of the company’s outstanding common stock in aggregate. Dov Gertzulin’s DG Capital Management trimmed its stake in Lumos Networks Corp (NASDAQ:LMOS) by 20% during the December quarter, ending the year with approximately 478,000 shares.

ConocoPhillips (NYSE:COP) also had one of its Directors buy some shares last week. Director Arjun N. Murti bought 7,500 shares on Wednesday through multiple transactions at prices varying from $39.20 to $39.25 per unit, increasing his stake to 12,500 shares. The Director acquired his initial stake during the final month of 2015, although he has been serving as a member of the Board since January 2015.

The timing of the first trades of new directors or executives may be very telling on some occasions, especially when those trades come significantly later than their appointment. The independent exploration and production (E&P) company has seen its shares decline by 34% over the past year or so, but there are signs that the stock has now bottomed-out. Specifically, the stock is up by 23% over the past month alone and could go even higher should crude oil prices continue their recovery trajectory. ConocoPhillips’ portfolio mainly comprises resource-rich North American unconventional assets and oil sands assets; lower-risk legacy assets in North America, Europe, Asia and Australia; as well as several major international developments.

In December 2015, ConocoPhillips announced its plans to make capital investments amounting to $7.7 billion during 2016, but the company cut its capital expenditures guidance to $6.4 billion earlier this year due to lower crude oil prices and credit tightening in the industry. The company also cut its quarterly dividend payment by 66% to $0.25 per share, in an attempt to maintain the health of its balance sheet. ConocoPhillips primary uses of cash in 2015 included $10.05 billion to fund capital expenditures and investments; $3.66 billion to pay dividends; and $103 million to reduce its debt load. The company generated $7.6 billion in cash from continuing operations in 2015, so the $2.37 billion in cash and cash equivalents available at the end of 2015 and the expected cash from continuing operations during 2016 appear to be enough to cover expenses and contractual obligations this year. The number of hedge funds in our database with stakes in the E&P company dropped to 31 from 44 during the December quarter. Donald Yacktman’s Yacktman Asset Management owns 4.66 million shares of ConocoPhillips (NYSE:COP) as of December 31.

Disclosure: None