Much research concludes that corporate insiders’ security purchases tend to beat broader market benchmarks on aggregate, but also finds that companies with heavy insider selling usually underperform companies with insider buying. Of course, those studies are particularly interesting for investors monitoring insider trading behavior as part of their stock selection and analysis process. However, some studies also find that corporate insiders, especially top-tier executives, usually time their purchases around bad news related to their companies’ developments and prospects, buying fewer shares before negative news announcements and more shares after those news are getting priced in. This finding serves as yet another explanation as for why insider purchases tend to beat stock indexes. For that reason, this insider trading article will discuss the recent insider purchases registered at several little-known companies.
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 kick off the so-called insider trading investigation by examining the insider buying at Engility Holdings Inc. (NYSE:EGL), which had its most powerful executives purchase shares in the past several weeks. To start with, freshly-appointed Chief Executive Officer, Lynn Dugle, purchased 5,554 shares on Monday for $18.38 each, after purchasing a new stake of 8,102 shares on Friday at prices that ranged from $18.12 to $18.30 per share. Ms. Dugle currently holds an ownership stake of 13,656 shares. Some companies require newly-appointed executives and Board members to own shares, so Ms. Dugle’s recent insider purchases may seem to be irrelevant to insider trading watchers. Moreover, President and Chief Operating Officer John P. Hynes snapped up 3,330 shares on March 21 at prices that fell between $18.03 and $18.08 per share, lifting his overall holding to 16,206 shares.
The shares of the provider of mission critical services to the U.S. government have plummeted 44% since the beginning of 2016, partly because the company issued disappointing guidance for fiscal 2016 in late January. The company’s management anticipates fiscal 2016 revenue in the range of $2.0 billion-to-$2.15 billion, notably below the $2.26 billion figure previously anticipated by analysts. At the same time, Engility Holdings Inc. (NYSE:EGL) said it anticipates adjusted EBITDA in the range of $180 million-to-$190 million.
The company provides a wide variety of services, including specialized technical consulting, engineering and technology lifecycle support, trading and education, among other things to the U.S. government personnel. The company’s revenue for 2015 reached $2.09 billion, up $719 million or 52.6% year-on-year. The massive increase was mainly driven by the acquisition of services provider to the national security and public safety markets, called TASC, in February 2015. Legacy Engility business revenue decreased $188 million year-on-year, mainly due to a decrease in U.S. Department of Defense (DoD)-related revenues of $203 million, which included a decline of $62 million related to the drawdown in Afghanistan. Shares of Engility are priced around 12.9-times expected earnings, below the forward P/E ratio of 17.5 for the companies included in the S&P 500 Index. There were 12 hedge funds monitored by Insider Monkey with stakes in the government services contractor, which amassed nearly 3% of the company’s outstanding shares. David Brown’s Hawk Ridge Management owned 203,377 shares of Engility Holdings Inc. (NYSE:EGL) at the end of December.
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The next two pages of this insider trading article discusses the insider buying witnessed at EV Energy Partners L.P. (NASDAQ:EVEP) and BancFirst Corporation (NASDAQ:BANF).
