The Dow Jones Industrial Average closed 396.66 points in the green on Friday, pushing the benchmark into positive territory for the week. However, Friday’s gains did very little to overshadow the terrible performance U.S. equities delivered in the first month of 2016. The Dow ended the month down by 5.5%, while the S&P 500 Index closed 5.1% in the red for the month. Last week’s insider buying slowed quite significantly relative to the previous week, whereas the volume of last week’s insider selling more than doubled week-over-week. The sharp increase in the ratio of insider selling to insider buying last week suggests that corporate insiders might have started to give in to the bearish views driving the stock market. In the meantime, there were several companies that witnessed large insider purchases last week at three finance-related companies. We will examine those trades as well as the recent performance of the companies in question.
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 (read more 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 with, American Express Company (NYSE:AXP) had an insider make a big purchase last week. According to a Form 4 filing, Director Ronald A. Williams bought 18,040 shares on Friday at a cost of $55.51 per share and currently owns 59,125 shares. The shares of the global services company are down by 23% thus far in 2016, turning the stock into the worst performer of the DJIA (Dow) benchmark. Just recently, the company reported its financial results for the fourth quarter of 2015 and full-year, which were not received very well by the market. American Express Company (NYSE:AXP)’s revenue net of interest expense for 2015 totaled $32.8 billion, down from $34.2 billion reported for 2014. Its net income reached $5.2 billion in 2015, compared to $5.9 billion reported for 2014.
It should be mentioned that the company’s co-brand and merchant acceptance agreements with Costco Wholesale Corporation (NASDAQ:COST) in the United States will expire in March 2016 and will not be renewed, which might have a further significant impact on the company’s top- and bottom-line results. The changing regulatory environment, the intensifying pressures on merchant fees and toughening competition has been shaping the payments industry in recent years, and American Express has suffered from the emergence of these factors. The company’s management anticipates posting earnings per share in the range of $5.40 to $5.70 for fiscal year 2016, while analysts expect an EPS figure of $5.36. Analysts’ estimates yield a forward price-to-earnings ratio of 9.96, which is visibly below the average of 15.89 for the S&P 500 firms and would be even lower if going by Costco’s estimates. A total of 52 hedge funds from our system had stakes in the company at the end of the third quarter, and had accumulated nearly 22% of its outstanding shares. Warren Buffett’s Berkshire Hathaway holds an ownership stake of 151.61 million shares of American Express Company (NYSE:AXP) as of September 30.
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Let’s head to the following two pages of this insider trading article, where we reveal several insider purchases registered at Zions Bancorporation (NASDAQ:ZION) and Total System Services Inc. (NYSE:TSS).
