MTS Systems Corporation (MTSC) and Two Other Companies with Insider Buying that Involves Two or More Insiders

Last week’s dollar volume of insider buying, excluding those purchases made by top 10% owners who are mostly categorized as investors rather than highly-informed insiders, has reached the lowest figure in the past several months. Similarly, the volume of insider selling fell quite notably week-over-week, but not as sharply as the volume of insider buying. The soft insider trading activity could be primarily explained by the soon-to-start first-quarter earnings season, which unofficially kicks off with the release of Alcoa Inc. (NYSE:AA)’s earnings report this Monday. The outlook for the upcoming earnings season does not look so bright, considering that S&P 500 companies are anticipated to post a first-quarter earnings drop of 9.1%. This sharp decline would mark the deepest quarterly earnings decline since the financial crisis of 2008, but some tend to believe that the decline will not be as severe as anticipated. As a result, one might expect U.S. equities to continue their sloppy bull run, as more companies can deliver earnings surprises given the grim expectations. Going back to the main aim of this article, Insider Monkey processed the few Form 4 filings submitted with the SEC on Friday and identified three companies with relatively noteworthy insider buying (just recall that last week’s insider buying was the weakest in months).

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 the discussion by taking an in-depth look at the insider buying registered at MTS Systems Corporation (NASDAQ:MTSC). President and Chief Executive Officer Jeffrey A. Graves bought a mere 322 shares on Friday for $51.83 apiece, lifting his ownership to 18,718 shares. Moreover, Director Chun Hung Yu purchased a much bigger block of shares on the same day, which consisted of 2,000 shares. That block was purchased at exactly $52 apiece, with the purchase boosting the Director’s holding to 9,345 units of common stock. The recent insider buying activity comes after the shares of the supplier of high-performance test systems and position sensors plunged on the announcement of a merger agreement to acquire sensors manufacturer PCB Group Inc. for $580 million. Shares of MTS Systems have fallen 15% in the past five days and are down 30% in the past 12 months, so the recent insider buying might suggest that the stock has entered the “cheap zone”.

PCB Group operates as a manufacturer of piezoelectric quartz sensors, accelerometers, and associated electronics that measure dynamic pressure, force and vibration. The merger between MTS Systems Corporation (NASDAQ:MTSC) and PCB Group is said to create a technology-leading “Test and Measurement” solutions provider serving a broad consumer base that includes original equipment manufacturers in automotive, aerospace, infrastructure and industrial products, as well as universities and research laboratories. MTS Systems plans to fund the merger with a combination of new debt and equity issuance, with the latter being anticipated to dilute current shareholders’ ownership. In fact, a possible dilutive share offering appears to explain the massive plunge in the share price of MTS Systems. Meanwhile, the soon-to-be combined company anticipates to achieve annualized revenue synergies of $20 to $30 million, as well as annualized cost synergies of $5 to $7 million over the next three to four years. The revenue-type of synergies are anticipated to be achieved from supplementary sales of MTS products to PCB Group’s current customer base and additional sales of PBC products to the acquirer’s customer base.

Shares of MTS are currently trading at 15.6 times expected earnings, below the forward P/E multiple of 17.4 for the S&P 500 benchmark. A total of 11 hedge funds from our system were invested in MTS at the end of December, amassing roughly 17% of the company’s total number shares. John W. Rogers’ Ariel Investments reported ownership of 1.57 million shares in MTS Systems Corporation (NASDAQ:MTSC) through its 13F filing for the final quarter of 2015.

The next two pages of this insider trading article discuss the insider buying witnessed at Tejon Ranch Company (NYSE:TRC) and American Equity Investment Life Holding (NYSE:AEL).

Tejon Ranch Company (NYSE:TRC) has seen two insiders adding to their positions in the past month or so. To start with, President and Chief Executive Officer Gregory S. Bielli snapped up 1,000 shares on Friday at $20.02 apiece, which boosted his overall ownership to 19,486 shares. Furthermore, Dennis Atkinson, Senior Vice President of Agriculture and Water Resources, bought 10,337 shares on March 24 at a weighted average cost of $19.51, lifting his overall holding to 42,045 shares. Although the aforementioned insider buying is not necessarily a strong bullish signal, retail investors examining a possible investment in Tejon Ranch get green light from insiders assuming there are separate reasons this investment is attractive.

Tejon Ranch Company operates as a diversified real estate development and agribusiness company whose operations involve land planning and entitlement, land development, commercial sales and leasing, leasing of land for mineral royalties, water asset management and sales, grazing leases, income portfolio management, farming, and ranch operations. The company’s main asset represents 270,000 acres of contiguous, mostly underdeveloped land. Tejon Ranch’s total revenues and other income were $52.06 million in 2015, as compared to $52.29 million in 2014 and $46.35 million in 2013. Meanwhile, the company’s 2015 net income was $2.95 million, which dropped from $5.66 million in 2014. The massive decline in the company’s 2015 bottom-line figure was driven by a severe decline in mineral resource revenues due to depressed oil prices throughout 2015, a notable increase in corporate expenses related to pension and staffing costs, as well as a decline in pistachio revenues as a result of poor yields caused by the mild winter of 2015.

Shares of Tejon Ranch have declined 21% in the past 52 weeks, but have gained 6% since the beginning of this year. The number of hedgies tracked by Insider Monkey with positions in the company climbed to eight from six during the December quarter; those eight funds amassed almost one-fourth of the company’s outstanding common stock. Martin Whitman’s Third Avenue Management had 2.26 million shares of Tejon Ranch Company (NYSE:TRC) in its equity portfolio at the end of 2015.

American Equity Investment Life Holding (NYSE:AEL) is yet another company that saw two executives purchase shares last week, though the transactions were not overly significant. Renee D. Montz, Executive Vice President and Deputy General Counsel, acquired 885 shares on Wednesday for $13.45 each, boosting her direct ownership stake to 2,753 shares. Ms. Montz also holds an indirect ownership stake of 957 shares, which is held through her employee stock ownership plan (ESOP). Moreover, Scott A. Samuelson, Vice President and Controller, purchased 3,000 units of common stock on the same day at prices that ranged from $13.44 to $13.45 per share, which lifted his direct-ownership holding to 8,888 units. Mr. Samuelson owns an additional 5,112 shares indirectly, which are held by the ESOP.

American Equity Investment Life Holding is an issuer of annuity and life insurance products that operates through several wholly-owned life insurance subsidiaries. To be more specific, the company’s core business involves the sale of fixed index and fixed rate annuities. The shares of the second biggest broker of index annuities in the U.S. have plummeted 22% in the past five days, after the Department of Labor announced tougher rules for selling more complex products such as indexed annuities. The so-called “fiduciary rule” will require companies to disclose more information about brokers’ compensation from sales of variable or indexed annuities, which is set to protect savers from receiving conflicted advice. Therefore, the freshly-revealed rule is anticipated to make it much more difficult for brokers such as American Equity Investment Life to earn commissions on the sales of financial products, as more people could turn their attention to low-cost index tracked funds.

Soon after the announcement of toughened rules, analysts at Sandler O’Neill downgraded the insurer of annuity and life insurance products to ‘Hold’ from ‘Buy’. Shares of American Equity Investment Life are down 55% in the past 52 weeks and change hands at around 4.8-times expected earnings, versus the forward P/E ratio of 17.4 for the S&P 500 gauge. The hedge fund sentiment towards the company declined in the December quarter, as the number of funds invested in the company dropped to 19 from 24 quarter-over-quarter. Ken Fisher’s Fisher Asset Management owns 2.71 million shares of American Equity Investment Life Holding (NYSE:AEL) as of December 31.

Disclosure: None