Insider Buying Points To Huge Upside For These 3 Beaten-Down Stocks

Rising interest rates, a struggling Chinese economy, declining crude oil prices and a strong U.S dollar are key factors that explain the increased volatility and wild swings in the U.S equity market this year. Of course, individual investors should not overlook these factors when making investment decisions, but the truth is that the U.S economy continues to be pretty solid despite facing numerous headwinds. The nation’s economy has been mainly supported by the depressed gas prices and tightening labor market, which have led to stronger consumer confidence. The high degree of uncertainty in the stock market makes it really hard for individual investors to pinpoint great buying opportunities at the moment, so they should consider turning their attention to the camp of stocks favored by corporate insiders. Extensive research has shown that insider purchases tend to outperform broader market benchmarks on aggregate; hence, mimicking insiders’ moves seems to be a winning investment strategy, regardless of market conditions. The Insider Monkey team stumbled upon three companies with noteworthy insider buying, which we’ll analyze in this article.

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.

Let’s begin the discussion with ExOne Co (NASDAQ:XONE), which had an influential insider purchase a massive block of shares recently. S. Kent Rockwell, Chairman and Chief Executive Officer since January 2013, recently purchased 1.42 million shares at a price of $9.13 each, boosting his overall holding to 4.21 million shares. The freshly-upped stake is held through the S. Kent Rockwell Trust and represents 28.8% of the company’s outstanding shares. It should also be mentioned that the purchase was made via a registered direct offering of common shares, intended to enhance ExOne Co (NASDAQ:XONE)’s liquidity position so as to meet its 2016 growth objectives.

The global provider of 3D printing machines has seen its shares decline by 45% since the middle of January 2015, mainly owing to the lower-than-anticipated demand for 3D printing machines. The company shipped 11 3D printing machines in the fourth-quarter of fiscal year 2015, extending the number of 2015 shipments to 38. The company also incurred higher production and selling costs during the year, as well as enhanced costs from general and administrative activities, so ExOne’s management might have to seek new ways to reduce costs and drive customer demand. The company introduced six new printable materials for use in its 3D printing systems last year, which could attract new customers this year. A mere three hedge funds tracked by Insider Monkey were invested in the struggling company at the end of the third quarter. Daniel S. Och’s OZ Management held 99,900 shares of ExOne Co (NASDAQ:XONE) on September 30.

The next two pages of this daily insider trading article reveal the insider buys reported at Catalyst Pharmaceuticals Inc. (NASDAQ:CPRX) and Ruby Tuesday Inc. (NYSE:RT).

Three different insiders have purchased shares of Catalyst Pharmaceuticals Inc. (NASDAQ:CPRX) over the past several days. To start with, Chief Operating Officer Steven R. Miller acquired 7,933 shares on Monday at a price of $1.80 per share and currently owns 457,687 shares. Director Charles B. O’Keeffe bought 5,000 shares last Friday at $1.94 apiece, lifting his overall stake to 377,126 shares. Last but not least, Donald A. Denkhaus, a Member on the company’s Board of Directors, doubled his ownership stake to 50,000 shares last Thursday. The 25,000-share block was acquired at a cost of $2.03 per unit of common stock.

The development-stage biopharmaceutical company focuses on prescription drugs targeting rare (orphan) neuromuscular and neurological diseases and disorders, but does not have approved drug candidates just yet. The company has three drug candidates in development at the moment, with its Firdapse for the treatment of Lambert-Eaton Myasthenic Syndrome (LEMS) being anticipated to gain approval from the FDA in the third quarter of 2016. Although it is uncertain whether Catalyst Pharmaceuticals will be successful in obtaining approval for this drug candidate, the company is already preparing the marketing campaign for Firdapse in the United States. The company appointed a Chief Commercial Officer back in 2015 and has been working with rare disease advocacy organizations to increase awareness of LEMS. Meanwhile, 14 smart money investors had stakes in the company at the end of September, owning 27% of its outstanding shares. Baker Bros. Advisors, managed by Julian and Felix Baker, holds 7.34 million shares of Catalyst Pharmaceuticals Inc. (NASDAQ:CPRX) as of September 30.

Ruby Tuesday Inc. (NYSE:RT) also had three insiders make big purchases this week. Director Stephen I. Sadove bought 15,000 shares yesterday at prices that ranged from $4.94-to-$5.23 per share, increasing his holding to 177,604 shares. Chief Legal Officer and Secretary Rhonda J. Parish purchased 10,000 shares on the same day at a cost of $5.25 per share and currently holds a 20,241-share position. Also on the same day, Director Donald E. Hess added 10,000 shares to his stake, which currently comprises 89,758 shares. The 10,000-share block was purchased at a cost of between $5.26 and $5.28 per share.

The shares of the owner and operator of the Ruby Tuesday casual dining chain and the Lime Fresh Mexican Grill fast casual restaurants are down by 15% over the past year. However, the stock might embark on a rebound in the future, considering that the company is in the process of undertaking a strategic brand transformation of the Ruby Tuesday concept. The company reported total revenue of $537.24 million for the 26 weeks that ended December 1, down from $540.66 million reported for the same period of the prior year. This decrease was mainly attributable to restaurant closings, partially offset by an increase in same-restaurant sales at its Ruby Tuesday restaurants. Even so, Ruby Tuesday experienced a decrease in customer traffic last year, so the company has yet to fully feel the effects of the brand transformation process. The number of hedge funds from our database with positions in the company climbed to 20 from 19 during the third quarter, with Royce & Associates, founded by Chuck Royce, upping its position in Ruby Tuesday Inc. (NYSE:RT) by 4% during the July-to-September quarter, to 2.02 million shares.

Disclosure: None