Investors Should Look For Clues in Insider Buying; 3 Companies with Eye-Catching Purchases

Peter Lynch, the former manager of the Magellan Fund at Fidelity Investments, once said that “Insiders might sell their shares for any number of reasons, but they buy them for only one: They think the price will rise”. Of course, insider buying is usually perceived as a bullish signal, but investors closely watching insider trading behavior should be aware that insiders may be wrong on some occasions. As Dr. Inan Dogan, the founder of Insider Monkey, said in a recent interview, “One insider might overestimate a company’s prospects,…”. For that reason, investors should rather look for clusters of insider buying, which are generally perceived as very strong bullish signals. These cluster buys do not occur too often, so investors should not pass up these strong signals. The Insider Monkey team has discussed a great deal of cluster buys over the past several months, so it remains to see how those companies in question will perform in the upcoming years. With that in mind, the following article will discuss some noteworthy insider purchases, as well as clusters of buying, witnessed at three companies.

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 imitating 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).

Let’s begin our discussion by looking into the recent insider buying registered at Avis Budget Group Inc. (NASDAQ:CAR). Director W. Alun Cathcart purchased a new stake of 20,000 shares on Monday at a price of $25.06 per share. Although the size of the purchase is not necessarily uncommon, this insider purchase might represent a strong bullish signal and let’s see why. The Director has been on the company’s Board since October 2011, but he is now buying shares of the company for the first time. Hence, the director should have a strong reason for making this bullish move at this point in time.

The shares of the provider of vehicle rental and car sharing services are down by 56% over the past 12 months, after having dropped by 26% since the beginning of 2016. Even though the company operated in an uncertain economic environment throughout 2015, Avis Budget Group Inc. (NASDAQ:CAR) managed to deliver stronger bottom- and top-line results than in 2014. The company generated net revenues of $8.50 billion in 2015, up from $8.46 billion in 2014 and $7.94 billion in 2013. Similarly, its net income reached $313 million in 2015, up from $245 million in 2014 and $16 million in 2013. As revealed by a fresh report published by Lucintel, the global car rental industry offers growth opportunities in both on-airport and off-airport market segments. The industry is anticipated to grow at a compound annual growth rate (CAGR) of 5.6% from 2016 to 2021, due to the fast-growing global tourism industry, globalization of corporate operations, and higher levels of income worldwide. Avis Budget Group generates roughly 70% of its vehicle rental revenue from on-airport locations, which makes us believe that the company is well-positioned to benefit from the aforementioned trends. The shares of Avis Budget Group are currently trading at 7.64 expected fiscal 2017 earnings, below the forward P/E multiple of 8.41 of Hertz Global Holdings Inc. (NYSE:HTZ) and significantly below the ratio of 16.15 of the S&P 500 Index. The number of hedge funds tracked by Insider Monkey with stakes in the Avis Budget Group dropped to 33 from 44 during the fourth quarter of 2015. Larry Robbins’ Glenview Capital owns 9.39 million shares of Avis Budget Group Inc. (NASDAQ:CAR) as of December 31.

The next page of this insider trading article reveals the recent insider buying witnessed at JAKKS Pacific Inc. (NASDAQ:JAKK) and Dynegy Inc. (NYSE:DYN).

JAKKS Pacific Inc. (NASDAQ:JAKK) witnessed a group of corporate insiders buy shares in the past several days, which is the type of insider buying investors should pay close attention to. To start with, Director Michael S. Sitrick snapped up 35,000 shares on Friday at a cost of $6.75 per share and lifted his overall holding to 62,313 shares. Chief Executive Officer, President and Secretary Stephen G. Berman purchased 5,000 shares on Monday at $6.94 apiece and currently owns 621,317 shares. Last but not least, Rex H. Poulsen, another member of the company’s Board of Directors, bought 10,000 units of common stock on Friday for $6.87 each, boosting his stake to 59,686 shares.

The producer and marketer of children’s toys and other consumer products has seen its shares decline 6% since the beginning of 2016, following a terrible performance in the second half of 2015. The company’s net sales in 2015 were $745.74 million, down from $810.06 million reported for the previous year. However, the revenue decline was in line with the company’s guidance, reflecting the “stellar performance” of one of its key product lines in 2014. JAKKS Pacific’s 2015 net income increased to $23.17 million from $21.51 million. Looking ahead, the company anticipates its 2016 net sales to grow roughly 7.0% year-on-year and diluted earnings per share to increase 10.0%. However, investors should expect a net loss in the range of $0.90 to $1.00 per diluted share for the first quarter of 2016, mainly due to higher marketing expenses in 2016, as well as the effect of Easter falling in the first quarter. More importantly, even though the company’s management plans to step up marketing investment in 2016, it still anticipates to deliver adjusted EBITDA growth of 28.0%. Jim Simons’ Renaissance Technologies reported owning 1.82 million shares of JAKKS Pacific Inc. (NASDAQ:JAKK) in its 13F filing for the December quarter.

It appears that the SEC has been receiving Form 4 filings from energy companies’ insiders on a daily basis for quite some time, so let’s take a brief look at the recent insider buying at Dynegy Inc. (NYSE:DYN). President and Chief Executive Officer Robert C. Flexon acquired 10,000 shares on Tuesday at a price of $10.08 per share and lifted his stake to 436,763 shares.

The shares of the power producer have plummeted by 61% over the past 52 weeks. The company’s business involves the production and sale of electric energy, capacity and ancillary services from its fleet of 35 power plants that yield approximately 26,000MW of generating capacity. On February 25, Dynegy announced the acquisition of certain power generation facilities from International Power S.A., a subsidiary of French power utility ENGIE, through a joint venture with private-equity firm Energy Capital Partners. The $3.3 billion acquisition is anticipated to close in the fourth quarter of 2016. A subsidiary of Dynegy will own 65% of the joint venture, called Atlas Power, while 35% will be owned by affiliates of ECP. Although some analysts considered this deal quite surprising given the company’s disappointing stock performance and weak balance sheet, most of them saluted the recently-inked deal. There were 36 smart money investors from our system invested in the company at the end of the December quarter, aggregately amassing nearly 46% of its outstanding common stock. Howard Marks’ Oaktree Capital Management held its position in Dynegy Inc. (NYSE:DYN) unchanged during the October-to-December period at 9.84 million shares.

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