Exploding Insider Buying at This Struggling Homebuilder and Two Other Companies

The Standard and Poor’s 500 Index has lost more than 9% thus far in 2016, while correlations among stocks was very high in January. Correlation is an indicator of how stocks or sectors move up and down at the same time, so high correlations usually suggest that both good and bad stocks get punished by the market all together. The average correlations for the S&P 500’s ten sectors reached 86.9% in January, so it is highly likely that some high-potential stocks are trading at very cheap prices at the moment. But how can individual investors identify beaten-down stocks trading at very attractive valuations? One way to find attractive stocks poised to generate desired trading profits is to track insider buying activity. Much research provides evidence that corporate insiders, especially top executives, make very well-timed trades, thanks to their strong knowledge about their companies’ businesses and industries. For that reason, the following article will discuss the recent insider buying observed at three companies.

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 (read more 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.

Beazer Homes USA Inc. (NYSE:BZH) saw eight different insiders buy sizable blocks of shares earlier this week, which is the kind of insider trading activity individual investors should pay close attention to. So let’s take a look at the most noteworthy purchases and attempt to find out what might have prompted insiders’ bullishness. To start with, Executive Vice President and Chief Financial Officer Robert L. Salomon purchased 6,500 shares on Friday and 3,000 shares on Monday at prices ranging from $6.08 to $7.23 per share, lifting his total stake to 155,736 shares. Non-Executive Chairman Stephen P. Zelnak has acquired 45,000 shares since Friday at prices that ranged from $6.23 to $7.24 per share and currently owns 136,920 shares. Director Larry T. Solari bought 10,000 shares on Monday at a cost of $6.62 per share, all of which are held by a trust fund. The trust owns 32,971 shares after the recent purchase, while the Director holds an additional direct ownership stake of 7,128 shares. Most importantly, Chief Executive Officer and President Allan P. Merrill snapped up 7,500 shares on Friday and 2,500 shares on Monday at prices varying from $6.25 to $7.25 per share, boosting his overall holding to 451,675 shares.

The diversified homebuilder saw its shares plummet a day after the stock closed in the green on the back of a stronger-than-expected earnings report, and it is not entirely clear what triggered the significant sell-off. Beazer Homes USA Inc. (NYSE:BZH)’s shares are down by 61% over the past 12 months, after having plunged by 43% in 2016. The beaten-down homebuilder reported total revenue of $344.45 million for the first quarter of fiscal year 2016 that ended December 31, up from $265.76 million reported for the same period of fiscal year 2015. Most importantly, the company generated total operating income of $9.15 million, compared to an operating loss of $9.49 million reported for the same period of the prior year. It is also worth mentioning that the stock trades at a very cheap forward P/E multiple of 3.44, well beneath the ratio of 10.80 for the homebuilding industry. Royce & Associates, founded by Chuck Royce, upped its stake in Beazer Homes USA Inc. (NYSE:BZH) by 111,500 shares during the fourth quarter, ending the three-month period with 806,075 shares.

Let’s head to the next two pages of this daily insider trading article, where we reveal the insider buying activity at Acuity Brands Inc. (NYSE:AYI) and Cubic Corporation (NYSE:CUB).

On Friday, Acuity Brands Inc. (NYSE:AYI) registered an insider purchas for the first time since late 2014, so let’s take a look at the company’s performance in the past several months. Director W. Patrick Battle bought 1,314 shares on Friday at a price of $189.98 per share and currently holds a stake of 1,479 shares. The stock of the provider of lighting and energy management solutions is 23% in the red year-to-date, but it is still up by nearly 12% over the past 12 months. The company’s mixed financial results for the first quarter of fiscal year 2016 that ended November 30 have put additional pressure on the stock. Acuity reported net sales of $736.6 million for the quarter, up from $647.4 million reported a year earlier. Moreover, net income reached a figure of $68.4 million, which marked an increase of 33.9% year-over-year.

The company’s top-line results missed analysts’ expectations of $740.3 million, but Acuity’s management continues to be very bullish about the company’s future prospects, with the growth rate for the North American lighting market anticipated to be in the mid-to-upper single digit range for 2016. Furthermore, the company expects that the lighting and lighting-related industries, including building automation systems, will achieve sound growth in the upcoming ten years or so, and Acuity Brands is well-positioned to capitalize on that growth. Nonetheless, the stock appears to be trading at a rather expensive forward P/E ratio relative to the broader market of 20.14, but the company’s multiple avenues for growth seem to justify the high valuation (the forward P/E ratio for the S&P 500 benchmark equals 15.87). Ken Heebner’s Capital Growth Management owned 315,000 shares of Acuity Brands Inc. (NYSE:AYI) at the end of September.

Cubic Corporation (NYSE:CUB) had not witnessed any insider buying activity since early 2010 until this week. Director John H. Warner Jr. acquired 6,000 shares on Monday and 3,000 shares on Tuesday at prices ranging from $30.17 to $32.70 per share. After the recent purchases, the Director holds an ownership stake of 14,726 shares. The provider of systems and solutions to the transportation and global defense markets has seen its stock tumble by 34% thus far in 2016, partly owing to the company’s disappointing earnings report for the first quarter of fiscal year 2016 that ended December 31. Cubic generated sales of $313.8 million for the quarter, compared to $318.5 million reported for the first quarter of the prior fiscal year. The decrease was mainly attributable to a decrease in sales of 4% from Cubic Transportation Systems, which offers integrated systems for transportation and traffic management, and a decrease of 2% in sales from Cubic Global Defense Systems, which supplies live and virtual military training systems, and other related products to the U.S Department of Defense. Furthermore, the company reported a net loss of $5.4 million for the first quarter of fiscal year 2016, compared to net income of $5.2 million reported a year earlier.

Earlier this month, Cubic Corporation completed the acquisition of GATR Technologies, a manufacturer of next-generation deployable satellite communication terminal solutions, for $232.5 million, which will expand the portfolio of communication solutions offered by Cubic’s Global Defense business unit. Richard S. Pzena’s Pzena Investment Management owns 501,384 shares of Cubic Corporation (NYSE:CUB) as of the end of the fourth quarter.

Disclosure: None