Insiders Give Vote of Confidence to Struggling Manufacturer, 2 Energy Companies

Corporate insiders comprehend better than anyone else the fundamentals of their companies and have a better understanding of their future prospects than any consultant, analyst or other non-insider market participant. Therefore, when insiders spend a substantial part of their hard-earned money on buying their companies’ stock, you know that insiders believe the market undervalues their companies’ potential. Hence, following their moves can yield higher odds of picking a winner. Peter Lynch, one of the most successful and widely-known investment gurus, once claimed that “insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise”. The Insider Monkey team identified three companies with notable insider buying activity, and this article will discuss some recent firm-specific developments that might have guided those insiders to buy shares.

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.

Titan International Inc. (NYSE:TWI) is among the three companies that have seen a large volume of insider trading activity on the buy side recently. Director Peter McNitt reported the acquisition of a 25,000-share stake on Wednesday at a price of $4.56 per share, which is held by the Peter McNitt Living Trust. The manufacturer of wheels, tires, wheel and tire assemblies, and undercarriage systems and components for off-highway vehicles has experienced a terrible year in terms of both stock and financial performance so far. Shares of Titan International Inc. (NYSE:TWI) are 59% in the red year-to-date, mainly due to the struggling agricultural market, which generates slightly more than 50% of the company’s net sales. Titan International reported sales of $308.8 million for the third quarter, down by 31% year-over-year. At the same time, net sales generated from the agricultural market added up to $157.4 million, compared to $227.7 million reported for the same period of last year. The sluggish demand for high horsepower equipment in the agricultural market and the impact of currency translation are two main factors that impacted Titan’s top-line figure in the third quarter.

The number of smart money investors with positions in the struggling manufacturer climbed to 19 from 16 during the third quarter, with them owning almost 22% of the company’s outstanding stock in aggregate. Mark Rachesky’s MHR Fund Management is by far the largest shareholder of Titan International Inc. (NYSE:TWI) among those 19 hedge funds, owning 8.01 million shares as of September 30.

Let’s head to the next page, where the insider buys registered at Rice Energy Inc. (NYSE:RICE) and Tidewater Inc. (NYSE:TDW) are closely examined and discussed.