These Companies’ Insiders Are Expecting Future Stock Gains

The major U.S stock indexes edged lower on Monday, mostly dragged down by utilities equities. This comes after a sharp rebound last week, resulting in the biggest weekly gain for the Standard and Poor’s 500 Index this year. In the meantime, some companies’ insiders bought more shares of their companies, which suggests that they expect strong future prospects for those companies. It is already widely-known that insiders can sell stock for a wide array of reasons, but they purchase stock for one simple reason: they believe their companies’ stock is undervalued. The Insider Monkey team pinned down three companies that have registered heavy insider buying activity lately, so this article will lay out and discuss the insider buys registered at those companies.

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 102% over the ensuing 38 months, outperforming the S&P 500 Index by more than 53 percentage points (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.

Air Products & Chemicals Inc. (NYSE:APD) is one of the three companies that has registered strong insider trading activity on the buy side recently. Chairman, President and Chief Executive Officer Seifi Ghasemi purchased a 20,000-share block on Friday at a price of $139.93 per share, lifting his overall holdings to 244,740 shares. The shares of the company are nearly 3% in the red year-to-date and seem to be fairly valued at the moment if considering their trailing price-to-earnings ratio of 23.84, which compares with a ratio 23.12 for the S&P 500 companies.

Air Products & Chemicals Inc. (NYSE:APD) reported fiscal year 2015 fourth quarter sales of $2.45 billion on October 29, which decreased by roughly 9% year-over-year. Even so, the company’s net income increased by 11% year-over-year to $397 million. This demonstrates that the company’s management has been quite successful in improving profit margins despite operating in a challenging environment. Meanwhile, 77 hedge funds monitored by our team were invested in the company at the end of the third quarter, amassing 28.50% of its outstanding common stock. Bill Ackman’s Pershing Square was the top equity holder of Air Products & Chemicals Inc. (NYSE:APD) within our database at the end of the September quarter, holding 20.55 million shares.

Let’s head to the next page of the article, where the insider buying activity at Nordstrom Inc. (NYSE:JWN) and Gap Inc. (NYSE:GPS) is closely analyzed.

Nordstrom Inc. (NYSE:JWN) has seen one of its Directors acquire a sizable block of shares this week. Philip G. Satre reported the acquisition of 17,600 shares on Monday at a price of $56.89 per share, all of which are held by the Satre Family Trust. After the recent purchase, the family trust fund holds an ownership stake of 42,361 shares. Just recently, the fashion specialty retailer slashed its sales and earnings per share guidance after reporting weaker-than-expected third quarter financial figures. Nordstrom’s net sales increased year-over-year to $3.2 billion for the quarter, but its same-store sales climbed by a mere 0.9%. The disappointing third quarter performance was mainly attributed to weaker sales trends, as less customers were shopping in Nordstrom’s stores. Just recently, UBS cut its price target on the stock to $63 from $82, while maintaining its ‘Buy’ rating. Meanwhile, the stock is down by 28% for the year, so it is no surprise to witness insiders purchase stock at the moment. The hedge fund sentiment towards the stock was very positive in the third quarter, as the number of smart money investors with positions in the company grew to 38 from 27 during the quarter. Ken Griffin’s Citadel Investment holds a 3.10 million-share position in Nordstrom Inc. (NYSE:JWN) as of the end of September.

Lastly, we will investigate the recent insider buying registered at Gap Inc. (NYSE:GPS). Chief Executive Officer Arthur L. Peck snapped up a 37,150-share stake on Monday at a weighted average price of $26.99, which is held by a trust fund. The CEO also holds a direct ownership stake of 129,160 shares. This purchase comes shortly after the global retailer offering apparel, accessories, and personal care products reported third quarter financial results that were in-line with analyst expectations and updated its full-year 2015 guidance.  The company reported earnings per share of $0.63 on revenue of $3.86 billion, compared with analyst estimates of EPS of $0.63 on revenue of $3.93 billion. Shares of Gap are down by 34% year-to-date, as the retailer has been struggling to turn around its Gap brand and improve its business performance. The number of hedge funds with positions in Gap at the end of the third quarter stood at 34, compared to only 21 at the end of the second one. Daniel S. Och’s OZ Management added a 2.80 million-share position in Gap Inc. (NYSE:GPS) to its portfolio during the third quarter.

Disclosure: None