Traders, investors, and other market participants have been busy anticipating what the Fed will do with interest rates as its two-day policy meeting looms. Unquestionably, this is the most closely scrutinized and highly anticipated decision on U.S interest rates in recent history. There are growing concerns that raising rates for the first time since 2006 will trigger a new wave of volatility in the equity markets, as net long positions in VIX futures reached a record high of 37,925 contracts on September 13. However, the Dow Jones Industrial Average gained 228.89 points on Tuesday, which seems to be pointing to a recovery in the stock markets. Some corporate executives embarked upon the upward wave of yesterday’s trading session by buying up big chunks of their companies’ stock, suggesting that these companies have a strong outlook over the long-term. Layne Christensen Company (NASDAQ:LAYN), FBR & Co (NASDAQ:FBRC), and Sunedison Inc (NYSE:SUNE) were the most noteworthy companies with a large volume of insider buying activity on Tuesday, and the following article will attempt to find out what has executives so bullish on their companies.
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 36 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 will begin by looking into Layne Christensen Company (NASDAQ:LAYN), a company that had two different insiders acquire stock on Tuesday. Michael J. Caliel, President and Chief Executive Officer of Layne, purchased 7,500 shares at a price of $6.09 per share, boosting his stake to 12,500 shares. One of the company’s Directors, Nelson J. Obus, acquired 10,000 shares for $5.96 apiece as well. After yesterday’s transaction, the Independent Director currently holds 252,802 shares. The shares of Layne have lost more than 38% year-to-date, partly owing to the steady downtrend that afflicted the stock since mid-July. The company’s freshly-reported financial results for the second quarter of fiscal 2016 put even more downward pressure on the stock. The company’s revenues dropped by 4.2% year-over-year to $176.3 million, while its reported loss came to $18.2 million, compared to $55.0 million a year ago. To sum up, it appears that the market overreacted to the recent financial results and the insiders are either attempting to hinder the stock’s downfall or trying to profit from the potentially undervalued stock. Peter Schliemann’s Rutabaga Capital Management holds 2.18 million shares of Layne Christensen Company (NASDAQ:LAYN) as of June 30, which account for 1.96% of its entire portfolio.
Let’s move on to FBR & Co (NASDAQ:FBRC), which operates as an investment banking and institutional brokerage firm. Richard J. Hendrix, who serves as the Chief Executive Officer and Chairman, bought 2,000 shares yesterday at a share price of $21.92 each. Following this acquisition, Hendrix owns 271,695 shares worth $6.04 million at the current price of $22.22 per share. The recent broader market selloff has beaten down the shares of FBR noticeably, so it might be the case that the executive is buying shares believing that they are trading at attractive levels at the moment. Looking at the broader picture, the stock has lost almost 10% since the beginning of the year. Earlier this month, FBR & Co announced the completion of its previously-announced acquisition of MLV & Co. LLC, which is an investment banking and brokerage firm that focuses on equity capital markets and which is a leading provider of At-the-Market offerings. This deal clearly indicates that the company is keen on expanding its operations and activities. Chuck Royce’s Royce & Associates is among the largest equity holders of FBR & Co (NASDAQ:FBRC) within our database, owning 298,801 shares.
Finally, we can turn our attention to Sunedison Inc (NYSE:SUNE). Ahmad R. Chatila, who has been the Chief Executive Officer and President of Sunedison since 2009, added 4,800 shares at $10.87 per share to his holding that now comprises 850,472 shares. The renewable energy stock had experienced a great run through mid-July, when it embarked on a steep downtrend leading to a significant loss of value. The shares of Sunedison have lost 63% over the past three-month period. Furthermore, the stock appears to be in a bottoming-out phase at the moment, so the CEO is seemingly piling up more shares so as to get an attractive return in the upcoming months or years. Some stock market participants tend to think that the second quarter earnings miss represents the primary reason for the stock’s decline. However, there is not only one reason that can fully explain the downfall; the actual reason for the sharp decline is multifaceted (read more details here). Sunedison Inc (NYSE:SUNE) represents the second-largest holding of David Einhorn’s Greenlight Capital as of the end of the second quarter, consisting of 24.84 million shares.
Disclosure: None
