Corporate Insiders at Alcoa Inc. (AA) and Two Other Battered Companies Keep Buying Shares

The insider buying activity in the past several weeks has been muted ahead of the first-quarter earnings season. However, aluminum producer Alcoa Inc. (NYSE:AA), whose earnings reports kick off each earnings season, witnessed insider buying earlier this week, which implies that quarterly trading blackout periods for insiders imposed by most companies are being gradually lifted. Therefore, one could anticipate insider buying activity to gain steam in the upcoming weeks. But why would anyone even pay attention to insider buying? Well, officers and directors mostly buy shares of their companies for one simple reason: they can be almost certain that those shares will appreciate over time. In addition, past research shows that non-insiders can earn abnormal returns by following insider buying activity, so it does pay off to track insider buying indeed. Having said that, the following article will reveal and discuss several insider purchases observed at three companies, including the aforementioned aluminum producer.

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).

Alcoa’s Insider Buy Shares Ahead of Separation

Alcoa Inc. (NYSE:AA) had two members of its Board of Directors purchase shares this week. To start with, Director Ratan N. Tata purchased 2,150 shares on Wednesday for $10.37 each, boosting his overall holding to 60,501 shares. Martin Sorrell, another Board member, snapped up 2,100 shares on the same day at $10.36 apiece, which lifted his ownership to 34,156 shares.

The shares of Alcoa have gained 7% since the beginning of 2016, but they are still down by 21% in the past 12 months. In September 2015, the company’s Board approved a plan to separate Alcoa into two independent, publicly-traded companies. One company will operate the Alumina and Primary Metals segments, while the other one, to be called Arconic, will include Alcoa’s Global Rolled Products (GRP), Engineered Products and Solutions (EPS), and Transportation and Construction Solutions (TCS) segments. These business segments generated combined revenue of $3.3 billion in the first quarter of this year. While shareholders such as Paul Singer’s Elliott Associates voiced their support for the aforementioned spin-off, analysts at JPMorgan believe that the Arconic breakup will not “create significant additional value unless Alcoa is able to merge its upstream business with a similar-size upstream producer”. Meanwhile, analysts at Credit Suisse believe Alcoa could support a valuation of $14 to $15 per share based on a sum-of-the-parts calculation.

There were 41 hedge funds tracked by Insider Monkey with stakes in Alcoa at the end of 2015, which aggregately hoarded up nearly 15% of the company’s shares. Beech Hill Partners, run by Paul Cantor, Joseph Weiss, and Will Wurm, owns 61,215 shares of Alcoa Inc. (NYSE:AA) as of March 31.

Let’s head to the next pages of this insider trading article, where we will discuss the insider buying witnessed at CymaBay Therapeutics Inc. (NASDAQ:CBAY) and Hovnanian Enterprises Inc. (NYSE:HOV).

Biopharmaceutical Company Witnesses Cluster of Insider Buying

CymaBay Therapeutics Inc. (NASDAQ:CBAY) has registered a cluster of insider buying in April involving three different executives. Patrick J. O’Mara, Vice President for Business Development, bought 5,000 shares on Friday at a cost of $1.64 per share, lifting his holding to 5,022 shares. Charles A. McWherther, Senior Vice President and Chief Scientific Officer, acquired 3,000 units of common stock on Friday at a price tag of $1.68 per share. After the recent purchase, Dr. McWherther owns 5,000 shares. Last but not least, Chief Financial Officer Sujal Shah purchased 55,000 shares at the beginning of April for $1.39 each.

The clinical-stage biopharmaceutical company focused on developing therapies for the treatment of metabolic diseases has seen its shares advance an impressive 33% since the beginning of 2016. However, the stock is down 55% in the past 52 weeks. CymaBay Therapeutics focuses on two key clinical assets: MBX-8025, which is designed for the treatment of various orphan and liver diseases; and arhalofenate, developed for the treatment of gout. CymaBay has successfully completed end-of-Phase 2 meeting discussions with the FDA regarding arhalofenate, but the company is currently discussing with possible partners to combine forces for the initiation of Phase 3 development for the drug this year.

The number of money managers from our database with positions in the clinical-stage biopharmaceutical company declined to seven from ten during the December quarter, with those ten funds accumulating almost 21% of the company’s outstanding shares. Adage Capital Management, founded by Phil Gross and Robert Atchinson, was the largest equity holder of CymaBay Therapeutics Inc. (NASDAQ:CBAY) on December 31 with 1.70 million shares.

Struggling Home Builder Receives Vote of Confidence from Board Member

Hovnanian Enterprises Inc. (NYSE:HOV) also had a Board member buy a sizable block of shares last week. According to a Form 4 filing recently submitted with the SEC, Director Vincent Pagano Jr. purchased 14,535 Class A shares last Thursday at prices that ranged from $1.73 to $1.74 per share, which increased his ownership to 111,688 shares.

The shares of the home builder have declined 49% in the past 12 months, partly owing to troubles caused by its weak balance sheet. The company has $86.5 million principal amount of 7.5% Senior Notes due on May 15, 2016, as well as $121.0 million principal amount of 8.625% Senior Notes due on January 15, 2017. Although the company has previously planned to refinance these notes, Hovnanian Enterprises recently asserted that the extremely challenging environment in the high yields market hinders the company from refinancing those obligations. Instead, the home builder plans to exit its Minneapolis, MN and Raleigh, NC operations by selling its land portfolios in those markets in an attempt to deleverage its balance sheet. Moreover, the company also plans to wind down its operations in the San Francisco Bay area in Northern California and in Tampa, FL.

Just recently, analysts at Deutsche Bank decreased the price target on Hovnanian Enterprises to $2 from $2.40 and reiterated the ‘Hold’ rating, citing balance sheet issues and lack of growth. After paying off approximately $233.5 million of debt that matured at the end of 2015 and early 2016, the company’s cash and cash equivalents were $147.1 million at the end of January. The management anticipates fiscal 2016 total revenues in the range of $2.7 billion-to-$3.1 billion. A total of ten hedge funds tracked by Insider Monkey were invested in the home builder at the end of December. Russell Lucas’ Lucas Capital Management upped its stake in Hovnanian Enterprises Inc. (NYSE:HOV) by 6% during the March quarter to 138,447 shares.

Disclosure: None