Does Insider Buying Spree Suggest These Stocks Are Poised To Explode?

The wild swings in the U.S equities markets are creating bountiful trading opportunities for intraday traders, but this volatility isn’t good for most market participants, including the hedge funds monitored by Insider Monkey. The Dow Jones Industrial Average is over 230 points in the red so far in today’s trading session, after recording a gain of slightly over 104 points on Monday. Leaving the uncertainty around the timing of the Fed’s rate hike and worries about China’s economic slowdown aside, some corporate insiders have been piling up their companies’ stock recently. It is no surprise that the insider buying activity is generally taken as a bullish sign, as it is hard to believe that there is someone in the market investing money without expecting a return. The Insider Monkey team identified three companies that had an increased flow of insider buying activity recently, and we will attempt to lay out potential reasons behind this activity. The companies in question are LivePerson Inc. (NASDAQ:LPSN), Triangle Petroleum Corporation (NYSEMKT:TPLM), and Aeropostale Inc (NYSE:ARO).

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 118% over the ensuing 36 months, outperforming the S&P 500 Index by over 60 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.

Let’s start our discussion by looking at the insider buying activity at LivePerson Inc. (NASDAQ:LPSN). The company’s director Wesemann G. William reported buying 10,000 shares at an exact price of $8.018 per share, enlarging his holding to 90,000 shares. In addition to this holding, the director also indirectly owns 20,000 shares through a family trust called Wasemann Family Trust – 2000. The provider of live digital engagement solutions has been struggling to lure investors this year, with its shares dropping by over 41% since the beginning of the year. The stock has not been trading at such low levels since 2010, so it appears that the director is buying on the belief that he is purchasing undervalued securities. Just a few days ago, the company announced the launch of two data centres in Australia, a decision that was driven by high regional demand for cloud services. Robert G. Moses’ RGM Capital reported the acquisition of a new stake of 2.01 million shares of LivePerson Inc. (NASDAQ:LPSN) in its 13F filing for the June quarter.

Moving on to Triangle Petroleum Corporation (NYSEMKT:TPLM), the company’s Chief Financial Officer, Justin J. Bliffen, purchased 2,500 shares at a weighted average price of $1.90 on Monday. After this recent transaction, the executive currently owns 200,005 shares. It is also worth mentioning that Bliffen acquired 15,000 shares last week, which should indeed be taken as a bullish sign. The shares of the independent energy company sank after it released its financial results for the second quarter of fiscal 2016 on September 8. Triangle Petroleum reported revenues of $55.26 million, which were down by 31% year-over-year. At the same time, the company reported a net loss of $193.35 million, compared to net profit of $14.55 million reported in the same quarter a year ago. This recent slump in the company’s share price has widened their year-to-date loss to 62%. Mason Hawkins’ Southeastern Asset Management boosted its long position in Triangle Petroleum Corporation (NYSEMKT:TPLM) during the second quarter to 10.21 million shares.

Finally, we will examine the insider trading activity at Aeropostale Inc (NYSE:ARO), which saw two different insiders buy stock during the previous week. Marc D. Miller, the Chief Operating Officer and Executive Vice President purchased 60,000 shares on Friday at prices ranging between $0.72-to-$0.73, boosting his stake to 190,122 shares. This stake also includes 73,530 restricted shares that vest on March 29, 2016. David J. Dick, who has been acting as Chief Financial Officer and Senior Vice President since joining the firm on February 17, 2015, purchased a new 25,000 share-stake last week, which was acquired at prices ranging between $0.79-and-$0.80. The shares of the teen apparel retailer have lost 69% since the beginning of the year, and are currently trading below the $1 mark, and the company may be delisted from the New York Stock Exchange if it fails to rise above $1 during the next 30 consecutive trading days. Scopia Capital Management, founded by Matt Sirovich and Jeremy Mindich, remains bullish on Aeropostale Inc (NYSE:ARO), holding 9.90 million shares as of June 30.

Disclosure: None