Generally, insider buying is believed to suggest management’s confidence in the company and its future outlook, whereas insider selling is usually seen as a bearish sign (however, insider selling may occur for numerous reasons unrelated to a company’s prospects). Therefore, investors, traders, and institutions might actually get a sense of different stocks’ prospects by tracking and examining insider trading activity. Even more to that, research has shown that investors can capitalize on insider knowledge by following insider trading activity and generate attractive returns from that. Ultimately, we identified three companies that registered noteworthy insider trading activity yesterday: Inovalon Holdings Inc. (NASDAQ:INOV), Impax Laboratories Inc. (NASDAQ:IPXL), and Integrated Silicon Solution Inc. (NASDAQ:ISSI). We’ll discuss in more detail the stock transactions associated with these companies’ insiders and the potential reasoning behind their moves.
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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 118% over the ensuing 35 months, outperforming the S&P 500 Index by over 60 percentage points (read the 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.
We’ll start with Inovalon Holdings Inc. (NASDAQ:INOV), a technology company that offers advanced cloud-based data analytics and data-driven intervention platforms to the U.S. healthcare industry. One of the company’s Independent Directors, Lee Roberts, purchased 19,000 shares through a single transaction dated August 27, at a price of $21.06 per share. After the transaction, the director owns a 26,698 share-stake in the company. Allegedly, the aforementioned transaction might be related to Inovalon’s recent acquisition of Avalere Health Inc., a provider of data-driven advisory services and business intelligence solutions to the pharmaceutical and life sciences industry. The freshly-announced $140 million deal is set to expand Inovalon’s leadership in the healthcare marketplace and allow the acquirer to expand into an expansive adjacent market. Avalere is already serving most of the top pharmaceutical companies in the United States and generated $47.1 million in revenues for fiscal 2014, so the deal is expected to bear much fruit for Inovalon. Considering that the shares of Inovalon are down by 21% year-to-date, they might be trading at a bargain price at the moment. Israel Englander’s Millennium Management is one of the shareholders of Inovalon Holdings Inc. (NASDAQ:INOV), owning 142,221 shares at the end of June.
