Most Insiders Tend To Buy Stock At The Right Time And Here Is Some Proof

The Dow Jones Industrial Average has closed in the green for six straight trading sessions and continues its recovery from the recent correction. Similarly, the Standard and Poor’s 500 Index has posted gains in eight out of the past nine trading sessions, which is yet another sign that most market participants are regaining their confidence in equities. This confidence comes despite the S&P 500 third quarter earnings being anticipated to decline by 5.1% quarter-over-quarter, which will surely put downward pressure on U.S stocks if the estimations do indeed prove to be accurate. However, the low-level estimates may also allow companies to more easily surpass analysts’ expectations, which could push stock prices to higher levels. Moving on to the primary purpose of this article, the Insider Monkey team identified three companies with a high volume of insider buying activity recently, which could suggest these insiders are anticipating just such a third quarter beat. The companies are HC2 Holdings Inc. (NYSEMKT:HCHC), Coffee Holding Co. Inc. (NASDAQ:JVA), and Spark Therapeutics Inc. (NASDAQ:ONCE). Therefore, the following article will attempt to find out what might have propelled these companies’ insiders to purchase shares, be it firm-specific developments or broader market prospects.

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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 more than 102% over the ensuing three-plus years, outperforming the S&P 500 Index by 53 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.

To start, let’s take a glance at the insider buying activity at HC2 Holdings Inc. (NYSEMKT:HCHC). Philip A. Falcone, who has been serving as the company’s Chairman, President, and Chief Executive Officer since May 2014, purchased 540,000 shares last Friday for $7.50 each. These shares were acquired through a private offering under which HGI Funding sold its entire stake of 4.68 million shares. After the acquisition, the executive currently owns slightly more than 1.42 million shares. The shares of the diversified holding company are 10% in the red year-to-date and it is not entirely clear where they are heading from here. Exactly two months ago, HC2 Holdings released its earnings report for the second quarter, posting net revenues of $281.0 million, which were up by $79.2 million year-over-year. The company’s operating income came in at $3.3 million, compared to $0.8 million reported a year ago. Having these financial figures in mind, the third quarter earnings report of HC2 is likely to shed some light on the future course of the company. Dov Gertzulin’s DG Capital Management reported an ownership stake of slightly more than 811,000 shares in HC2 Holdings Inc. (NYSEMKT:HCHC) via its 13F filing for the June quarter.

Let’s now turn our focus on Coffee Holding Co. Inc. (NASDAQ:JVA), a wholesale coffee dealer and roaster that saw one of its most important figures acquire stock last week. Andrew Gordon, who has acted as Chief Executive Officer, President, Treasurer, and Director since 1997, and Chief Financial Officer since 2004, reported the acquisition of 5,000 shares at prices ranging from $4.05 to $4.11, all of which are owned directly by A. Gordon Family Ventures LLC. Following the transaction, the executive’s affiliate company owns 233,183 shares. A little more than a month ago, Coffee Holding Co. released its financial results for its fiscal third quarter that ended July 31, posting net sales of $27.0 million compared to $26.6 million reported a year ago. This marked the company’s third straight quarter with year-over-year sales growth in spite of the challenging coffee market and commodity pricing. However, the company’s stock performance continued its downward trend, which appears to be turning around only now. The shares of Coffee Holding have lost nearly 20% since the beginning of the year, which might point to the fact that the executive is buying shares on weakness. Ken Griffin’s Citadel Investment Group acquired a 10,907-share stake in Coffee Holding Co. Inc. (NASDAQ:JVA) during the second quarter.

Finally, we will take a look into the insider trading activity at Spark Therapeutics Inc. (NASDAQ:ONCE). Director Steven M. Altschuler acquired a new stake of 5,000 shares last Wednesday at a weighted average price of $49.11. Surprisingly, this purchase was made just a few days before the company presented additional data from its Phase 3 pivotal trial, including continued durability data from a previous Phase 1 study of SPK-RPE65. This represents the company’s lead product candidate for the treatment of RPE65-mediated inherited retinal dystrophies (IRDs). The freshly-released positive top-line results from the Phase 3 clinical trial for the treatment of rare blinding conditions seems to have pleased both investors and its future patients. The shares of Spark advanced by more than 4% in today’s pre-market trading session, but are now down by 1.18% today and are over 2% in the red year-to-date. Baker Bros. Advisors, founded by Julian and Felix Baker, represents the largest shareholder of Spark Therapeutics Inc. (NASDAQ:ONCE) within our database, owning 1.26 million shares.

Disclosure: None