Insider Buying Metric Points At 3 Stocks Poised To Grow In 2016

Insider trading followers might have noticed that insider trading activity, especially on the buy side, has been quite sluggish in the first trading sessions of 2016. But why would anyone waste time for tracking insider trading behavior? What can one make of this type of activity? Generally, insider buying is perceived as a bullish signal by market participants, and it is believed to show insiders’ confidence in their companies’ future prospects and developments. It should be mentioned that insiders primarily buy shares based on their perceptions about how undervalued or overvalued their company’s stock is (which might not be accurate on some occasions), and it is highly unlikely that they trade on material non-public information (they will get caught by the SEC if they do). Even if insiders had notable non-public information and wanted to capitalize on that knowledge, they would have engaged in complex options strategies that would minimize the risks of being caught rather than investing in equities. Moving on to the underlying purpose of this article, the Insider Monkey team identified three companies that reported noteworthy insider buying in the last two weeks or so. So let’s proceed with the discussion of the insider trading activity observed at those companies and their recent performance.

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 102% over the ensuing 38 months, outperforming the S&P 500 Index by more than 53 percentage points (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.

Let’s begin our discussion by examining the insider trading behavior witnessed at Layne Christensen Company (NASDAQ:LAYN). Director Nelson J. Obus, who is also the co-founder of Wynnefield Capital,  snapped up 230,895 shares last week at prices that ranged from $4.94 to $5.23 per share, boosting his overall holding to 623,553 shares. Only 14,638 of these shares are held directly by Nelson Obus, while the remaining shares are held indirectly through the Wynnefield Entities. The shares of this global water management, construction and drilling company have declined 44% over the past year, but the stock has embarked on a steady uptrend since mid-December. The company’s revenues for the nine months that ended October 31 totaled $523.8 million, down $18.1 million or 3.3% year-over-year. Layne Christensen Company (NASDAQ:LAYN) has been conducting a review of its global operations and has also been undertaking cost cutting efforts so as to improve efficiency. In mid-2015, the company initiated a plan to exit its operations in Africa, as a result of the sustained decline in the minerals market. It remains to see whether the management’s cost cutting efforts and review of its operations will enable the company to achieve a much-needed turnaround. The number of hedge funds from our database with positions in the company declined to nine from 16 during the third quarter. Peter Schliemann’s Rutabaga Capital Management reported owning 2.18 million shares in Layne Christensen Company (NASDAQ:LAYN) through the latest round of 13Fs.

The next page of this insider trading article discusses the insider buying reported at Prospect Capital Corporation (NASDAQ:PSEC) and Herman Miller Inc. (NASDAQ:MLHR).

Prospect Capital Corporation (NASDAQ:PSEC) registered an extremely high volume of insider buying in December, and even ‘insider trading anomaly’ skeptics should pay close attention to this company’s insider trading behavior. To start with, Chief Executive Officer John F. Barry purchased 4.12 million shares during the holiday-shortened trading week ahead of Christmas at prices that fell between $6.76 and $7.38 per share. After the recent sizable purchases, the CEO currently holds a 12.97 million-share stake. Chief Operating Officer M. Grier Eliasek bought 150,000 shares during the same week at a weighted average price of $6.87, lifting his stake to 627,196 shares. This business development company (BDC) mainly lends to and invests in middle market privately-held companies, and its financial performance is strongly correlated with borrower risk. BDCs, including Prospect Capital, generate returns by issuing high-yield loans to privately-held companies, which explains the recent slump of Prospect’s stock. The shares of Prospect Capital are down by nearly 16% over the past one-year period and are trading substantially below the company’s Net Asset Value (NAV), which could somewhat explain executives’ major purchases. A total of 12 smart money investors tracked by Insider Monkey had stakes in the company at the end of the third quarter. Scopia Capital, managed by Matt Sirovich and Jeremy Mindich, owns 2.26 million shares in Prospect Capital Corporation (NASDAQ:PSEC) as of September 30.

Last but not least, Herman Miller Inc. (NASDAQ:MLHR) had two different insiders purchase shares in the past two weeks or so. John G. Edelman, Chief Executive Officer of Design Within Reach (a North American marketer and seller of modern furniture, lighting, and accessories acquired by Herman Miller in 2014), acquired a new stake of 3,600 shares on December 23 for $28.43 each. Moreover, President of Design Within Reach purchased a 3,000-share stake on December 21 at $28.36 apiece. The office-furniture company has seen its shares drop by nearly 3% over the past year, after plummeting 14% since the beginning of December. In mid-December, the company reported its financial results for the second quarter of fiscal 2016, ended November 28. Herman Miller posted net sales of $580.4 million for the quarter, up by 2.7% year-on-year. Its net earnings per share reached $0.57 on a diluted basis, as compared with $0.46 reported a year ago. The company has a relatively cheap valuation at the moment if considering its price-to-earnings ratios. The stock trades at a forward P/E of 12.17, which is notably below the average of 17.44 for the companies included in the S&P 500. Ken Grossman and Glen Schneider’s SG Capital Management acquired a 565,457-share stake in Herman Miller Inc. (NASDAQ:MLHR) during the third quarter.

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