Insider Buying Metric Points to More Upside for These Three Stocks

The previous trading week turned out to be quite tough for investors, but corporate insiders did not eschew buying more shares of their companies. Statistics reveal that insider buying was significantly more prominent last week relative to the previous one, marking one of the busiest weeks in terms of insider buying in the past several months. The insider buying activity is quite straightforward to interpret and is generally perceived as a bullish sign. This type of activity suggests insiders’ confidence in the future prospects of their companies, but one should still conduct his/her due diligence on a specific company prior to mimicking insiders’ moves. Truth be told, insiders may overestimate the potential of their companies on some occasions due to bias, which could result in a loss of wealth. Having said that, the following article will examine the insider buying registered at three companies and will also discuss firm-specific developments that might have caused insiders’ bullishness.

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 kick off the examination by looking into the insider buying activity at Patrick Industries Inc. (NASDAQ:PATK). Andy L. Nemeth, Chief Financial Officer since May 2003 and Executive Vice President of Finance since May 2004, purchased 4,162 shares yesterday, and 3,838 shares on Friday at prices in the range of $38.14-to-$38.40 per share. After these transactions, the CFO currently holds an ownership stake of 76,999 shares. The manufacturer of building products and materials for the recreational vehicle and manufactured housing industries has seen its shares advance by 31% since the beginning of the year, but they are still trading at an attractive trailing price-to-earnings ratio of 15.94 (compared to a ratio of 22.70 for the S&P 500). Patrick Industries Inc. (NASDAQ:PATK) has registered double-digit earnings growth for eight consecutive quarters, thanks to its previously-completed acquisitions. At the same time, the company’s third quarter sales climbed by 14% year-over-year to $214.8 million. Meanwhile, 19 hedge funds tracked by Insider Monkey had positions in the company at the end of the second quarter, amassing 15.30% of its outstanding common stock. Richard Driehaus’ Driehaus Capital Management owns 139,491 shares of Patrick Industries Inc. (NASDAQ:PATK) as of September 30.

The next page of this daily insider buying article reveals the insider buys registered at Interval Leisure Group Inc. (NASDAQ:IILG) and Dynegy Inc. (NYSE:DYN).

Interval Leisure Group Inc. (NASDAQ:IILG) has seen two top executives purchase shares over the past several days. Chief Financial Officer and Executive Vice President William L. Harvey snapped up 7,298 shares yesterday at a weighted average price of $15.48, enlarging his overall holdings to 136,513 shares. Craig M. Nash, who has served as Chairman, President, and Chief Executive Officer since the company’s inception back in 2008, bought 18,835 shares yesterday and 3,754 shares on Friday at prices between $14.90 and $15.98 per share. After the recent purchases, the CEO currently owns 743,677 shares. The shares of the provider of lodging and leisure services have embarked on a steady downtrend since early-June and are down by 26% for the year. Just recently, Interval Leisure Group reported third quarter consolidated revenue of $174.0 million, which was up by 18.7% year-over-year. However, its diluted earnings per share decreased to $0.33, from $0.37 reported in the same period last year. The stock is trading quite cheaply relative to the broader market if considering its trailing P/E ratio of 11.61. The number of hedge funds with positions in the company climbed to 17 from 15 during the second quarter. Jim Simons’ Renaissance Technologies upped its position in Interval Leisure Group Inc. (NASDAQ:IILG) by 259,860 shares during the third quarter to 312,900 shares.

Let’s conclude our discussion by examining the insider buying activity at Dynegy Inc. (NYSE:DYN). A recent filing with the SEC revealed that President and Chief Executive Officer Robert C. Flexon added 10,000 shares to his holdings on Friday, lifting them to 426,763 shares. The 10,000-share block was purchased at $16.70 apiece. Furthermore, Daniel P. Thompson, Executive Vice President of Plant Operations – Coal, acquired 1,000 shares last Tuesday at a price of $17.55 per share, increasing his holdings to 19,583 shares. Earlier this month, the Houston-based power plant operator reported third quarter revenues of $1.23 billion, compared to $615 million delivered last year. Even so, the company’s net loss widened year-over-year to $24 million from $5 million. The mild temperatures during the third quarter reduced the demand for power, which in turn put downward pressure on power prices. The number of hedge funds monitored by our team with positions in the energy company stood at 52 at the end of the June quarter, compared to 4 following the prior one. These money managers accumulated 43.40% of the company’s shares on June 30. Howard Marks’ Oaktree Capital Management reported owning 9.84 million shares of Dynegy Inc. (NYSE:DYN) through the latest round of 13F filings.

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