Strong Insider Buying Activity Might Point To Three Stocks Poised To Explode

It seems that Wall Street and stock market participants in general do not entirely see where the market is heading from here. The Dow Jones Industrial Average closed 47.27 points in the green on Tuesday after losing more than 300 points a day earlier. At this moment, the market is faced with a dilemma as to whether the recent pullback is a short-term correction of the long-running bull market or represents the early stages of a longer-term downtrend. Some corporate executives have been ignoring the turmoil, volatility, and global macroeconomic concerns by heavily loading up on shares of their companies. Indeed, valuations are now more attractive than they were a few months ago, so insiders may be acquiring shares on weakness at the moment. The following article will discuss the insider buying activity at three companies: Joy Global Inc. (NYSE:JOY), New Mountain Finance Corp. (NYSE:NMFC), and Darden Restaurants Inc. (NYSE:DRI). We will attempt to find out what might have compelled insiders to be so excited about their companies’ outlook amid a broader market “correction”.

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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 now get back to the three alluring companies. Paul Eric Siegert, a Director of Joy Global Inc. (NYSE:JOY), reported purchasing 25,000 shares at prices in the range of $14.77 to $14.84 earlier this week. After this acquisition, the Director now has a total stake of 68,072 shares. Mark J. Gliebe and Richard B. Loynd, two other Directors on the company’s Board, acquired shares two weeks ago as well. The former purchased 5,500 shares at a price of $19.04 per share, enlarging his stake to 10,748 shares. In the meantime, the latter bought 5,000 shares for $18.60 each and currently owns 58,526 shares. The underground mining equipment manufacturer has seen its stock drop by more than 68% since the beginning of the year, and it seems that even the heavy insider buying activity cannot stop the stock’s downfall. Joy Global’s operations and financial results have been impacted by the challenging end-market environment caused by slumping commodity prices. However, these insiders might be betting on a turnaround, which will surely happen sooner or later. Jeffrey Bersh and Michael Wartell’s Venor Capital Management is betting on a turnaround as well, given that it acquired a new 768,300-share stake in Joy Global Inc. (NYSE:JOY) during the second quarter.

We will move on to New Mountain Finance Corp. (NYSE:NMFC), a private equity firm primarily focused on growth equity transactions, leveraged acquisitions, and management buyouts. Steven B. Klinsky, the Founder of the company and the Chairman of its Board of Directors, bought 500,000 shares at $14.14 apiece last Friday, boosting his stake to 3.06 million shares. It is also worth noting that Klinsky owns an additional 849,000 shares indirectly either through the Steven B. Klinsky Trust or the Steven B. Klinsky Non-GST Exempt Trust. The chairman acquired the shares in his latest transaction through an underwritten offering of 5.75 million shares of common stock. The capital raised from the offering is intended to be used for new investments in portfolio companies, which points to the fact that the company is ready to grow and deliver attractive gains for its shareholders. The shares of New Mountain have slumped significantly since mid-September, but it appears that they are bouncing back at the moment. Michael Novogratz’s Fortress Investment Group owns 150,000 shares of New Mountain Finance Corp. (NYSE:NMFC) as of June 30.

Finally, Darden Restaurants Inc. (NYSE:DRI), which owns and operates over 1,500 restaurants, saw two insiders buy stock on Friday. Director Charles M. Sonsteby added 2,000 shares at $71.23 per share to his holding that now consists of 5,500 shares. At the same time, James P. Fogarty, another Director, acquired 2,900 shares for $70.50 each, increasing his position to 4,890 shares. Just a few days ago, the company reported its financial results for the first quarter of fiscal 2016 that ended August 30, 2015. The company reported higher-than-expected sales, thanks to the strong improvements of its Olive Garden brand. Darden’s revenues increased by 5.7% year-over-year to $1.69 billion last quarter, so the company raised its full-year guidance on adjusted earnings per diluted share from continuing operations to between $3.15 and $3.30, compared to its previously-disclosed guidance of $3.05-to-$3.20. Let’s not forget to mention that the shares of Darden have advanced by more than 15% since the beginning of the year, greatly outperforming the broader market. Jeffrey Smith’s Starboard Value LP, which pushed Darden Restaurants Inc. (NYSE:DRI) to spin-off some restaurants into an REIT (i.e. the spinning-off is in the process of being completed), represents the largest shareholder of the company within our database, with 11.64 million shares.

Disclosure: None