Strong Insider Buying Activity Could Be Pointing To Bright Futures For These Stocks

Many tend to believe that the broader market selloff is already behind us and the market is anticipated to be driven merely by the financial figures disclosed during the third quarter earnings season in addition to the Federal Reserve’s decision on interest rates. In the meantime, most U.S equites have become more attractive as a result of the recent volatility, and some companies’ insiders have been busy boosting their holdings as a result. The Insider Monkey team identified three companies that had a large volume of insider buying activity recently, so this article will discuss what might have guided these companies’ insiders to acquire stock. The three companies in question are represented by Ferrellgas Partners L.P. (NYSE:FGP), OvaScience Inc. (NASDAQ:OVAS), and Dominion Midstream Partners LP (NYSE:DM).

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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 36 months, outperforming the S&P 500 Index by 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.

Let’s start off by looking into the insider trading activity at Ferrellgas Partners L.P. (NYSE:FGP), a supplier of propane in the United States. Director Daniel G. Kaye purchased 5,000 shares last Friday at $19.60 apiece and enlarged his holding to 25,000 shares in the process. Ferrellgas Partners has been growing its operations and activities over the past few years, which does not seem to be reflected in the company’s stock performance. The company acquired Sable Environmental LLC last year for $124.7 million, in an attempt to diversify into the midstream sector. Furthermore, Ferrellgas Partners pursued another M&A deal with the purpose of expanding its midstream business by acquiring Bridger Logistics LLC this June for $837.5 million. Even so, the shares of the propane retailer have lost more than 9% since the beginning of the year; hence, the Director might be buying shares with the belief that they are undervalued. Jim Simons’ Renaissance Technologies acquired a 193,000-share stake in Ferrellgas Partners L.P. (NYSE:FGP) during the June quarter.

Moving on to the next stock that should be on investors’ watchlists, OvaScience Inc. (NASDAQ:OVAS) saw one of its Directors acquire shares this week. Marc D. Kozin reported purchasing 4,800 shares at a weighted average price of $10.79, lifting his stake to 20,553 shares. The fertility company saw high activity in terms of insider buying last month as well, when Director Mary Fisher added 6,100 shares, acquired at a price of $16.49 per share, to her holding that now comprises 6,415 shares. At the same time, Kozin himself acquired 3,000 shares for $17.60 each last month. The shares of OvaScience have plummeted by over 75% year-to-date, partially owing to the company’s announcement that the sales of its Augment treatment would not meet the company’s 2015 target. OvaScience’s management blames the M&A activities within its key clinics for the lower-than-expected demand. Therefore, it seems that the Director is acting more in the fashion of a long-term value investor, so the stock might represent a good trading opportunity considering that all the bad news seems to already be incorporated into the share price. Adage Capital Management, founded by Phill Gross and Robert Atchinson, is the largest equity holder of OvaScience Inc. (NASDAQ:OVAS) within our database, holding 2.53 million shares as of June 30.

Finally, we will take a glance at the insider buying activity at Dominion Midstream Partners LP (NYSE:DM). Director John W. Snow reported the acquisition of 17,500 shares at prices in the range of $28.12-to-$28.44. Following the recent transactions, the Director owns 69,959 shares valued at $1.93 million. Dominion operates as a limited partnership that owns liquefied natural gas (LNG) import, storage, regasification, and transportation assets; therefore, it is no surprise that its shares have been on a decline this year. In fact, the stock has lost nearly 30% since the beginning of the year, and some analysts believe that the risk/reward ratio of the stock is quite attractive at the moment. For instance, D.A Davidson & Co.’s analyst, Poe Fratt, believes that Dominion Midstream Partners is “well-positioned to grow consistently since the dropdown inventory is very large and the assets available for dropdowns are good fits due to the long-term fee-based contracts that are in place.” Thus, the Director may be sharing the same belief, so do not forget to include this stock in your list of high-potential stocks. Balyasny Asset Management, founded by Dmitry Balyasny, disclosed owning 166,100 shares of Dominion Midstream Partners LP (NYSE:DM) through its latest 13F filing.

Disclosure: None