Three Companies with Noteworthy Insider Buying Amid Weak Insider Trading Activity

The history proves that corporate insiders’ acquisition of their own companies’ stock tend to outperform the stock market gauges by a wide margin. It is generally believed that corporate insiders purchase shares for one simple reason: they believe their companies’ shares are undervalued. And this theory appears to be accurate, as it is quite hard to come up with other explanations on why insiders spend their hard-earned capital to buy their companies’ stock. Each retail investor and stock market participant can visit the U.S. SEC website to find fresh insider trading transactions, but it is very cumbersome to look through hundreds of Form 4 filings on a daily basis. Insider Monkey posts insider trading articles on a daily basis, which usually discuss clusters of both insider buying and selling that deserve investors’ attention. The Insider Monkey team processed numerous Form 4 filing submitted with the SEC on Monday and identified three companies with notable insider buying. Although the insider trading activity have been slowing in the past several days prior to the start of the first-quarter earnings season, there are some companies that continue to observe insiders pile up more shares. So let’s proceed to the discussion of the insider trading behavior recently witnessed at three companies.

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).

As revealed by our insider trading database, Ulta Salon, Cosmetics & Fragrance Inc. (NASDAQ:ULTA) had not witnessed any insider buying since late 2014 until this week. Director George R. Mrkonic Jr. purchased 2,000 units of common stock on Monday at $191.45 apiece, lifting his ownership stake to 2,482 shares. Considering the beauty retailer’s exceptional stock performance in the past several years, it is quite surprising that the company witnesses insider buying at this point in time. Shares of the company have advanced by 278% in the past five years and are up 26% in the past year alone. In fact, the stock is currently trading near its 52-week and all-time highs.

Ulta Salon, Cosmetics & Fragrance Inc. (NASDAQ:ULTA) generated net sales of $3.92 billion during fiscal 2015 that ended January 30, up from the $3.24 billion reported for fiscal 2014. The company’s comparable sales, which include sales for stores open at least 14 months and e-commerce sales, grew 11.8% in fiscal 2015, after registering a growth rate of 9.9% in fiscal 2014. ECommerce sales for fiscal 2015 increased by a whopping 47.5% year-on-year to $221.1 million. Meanwhile, the company’s net income grew by an annual 24.5% to $320.0 million. That being said, the primary question most investors ask themselves at the moment is whether the beauty specialist can keep growing in the quarters and years ahead. Clearly, Mr. Mrkonic appears to be confident in the company’s future outlook, but most analysts do not see too much upside for the company’s stock. The stock has an average 12-month price target of $188, which is slightly below the current share price. Nonetheless, the largest beauty retailer in the United States anticipates its fiscal 2016 comparable sales to grow in the range of 8%-to-10%, so there is more room to run for the company. ECommerce sales are anticipated to grow in the “40%” range, while the earnings per share growth is expected to be between 18% and 20%. Furthermore, the company plans to incur capital expenditures of approximately $390 million during fiscal 2016, up from $299 million incurred during fiscal 2015. Therefore, the beauty retailer is keen on preserving its freshness and dominant position in the industry by channeling more capital towards enhancements at the expense of delivering even higher bottom-line figures. The stock is priced around 26.6-times expected earnings, notably above the forward P/E of 17.6 for the S&P 500 Index. A total of 31 hedge funds from our system had stakes in the beauty retailer at the end of December 2015, amassing 15.40% of its outstanding common stock. Stephen Mandel’s Lone Pine Capital reported ownership of 3.58 million shares of Ulta Salon, Cosmetics & Fragrance Inc. (NASDAQ:ULTA) in its 13F filing for the December quarter.

Let’s head to the next pages of this article, where we discuss the insider buying witnessed at New York Community Bancorp Inc. (NYSE:NYCB) and Kronos Worldwide Inc. (NYSE:KRO).

New York Community Bancorp Inc. (NYSE:NYCB) also had one member of its Board of Directors purchase a relatively sizable block of shares last week. Non-Executive Chairman Dominick Ciampa snapped up 10,000 shares on Wednesday at $15.81 apiece, all of which are held indirectly through a trust fund. Following the recent transaction, the trust fund continues to own 23,182 shares. Mr. Ciampa also holds a direct ownership stake of 151,446 shares, as well as 311,504 shares held indirectly through a Foundation and 160,747 shares through his Individual Retirement Account (IRA). The Chairman has also been granted 55,000 shares under various stock awards, which will vest gradually in the upcoming years.

New York Community Bancorp is a multi-bank holding company with two main subsidiaries: New York Community Bank and New York Commercial Bank. The Community Bank operates 227 branches in Metro New York, New Jersey, Ohio, Florida, and Arizona, while the Commercial Bank operates 30 branches in Metro New York. At the end of October 2015, the multi-bank holding company inked a merger agreement with Astoria Financial Corp (NYSE:AF), under which Astoria will merge with and into New York Community Bank. Under the terms of the merger, Astoria shareholders will receive one share of NYCB common stock and $0.50 in cash for each share of Astoria. The shares of New York Community Bank plummeted on the announcement, as investors feared that the merger will result in dividend cuts given that the bank was set the $50 billion “systemically important financial institution” (SIFI) threshold. The SIFI compliance involves stricter capital requirements, liquidity requirements, capital stress test requirements, dividend limits, among other things. Therefore, it is highly likely that New York Community Bank will have to cut its dividend payment, considering its relatively high payout ratio. NYCB’s shares are down 7% in the past 12 months. However, investors should bear in mind that the company was on track to cross the SIFI threshold organically this year anyway, so the aforementioned merger is not necessarily bringing additional regulatory requirements that the company could have avoided. The company currently pays out an annualized dividend of $0.68 per share, which denotes a dividend yield of 4.36%. David Harding’s Winton Capital Management acquired a 2.26 million-share position in New York Community Bancorp Inc. (NYSE:NYCB) during the December quarter.

Kronos Worldwide Inc. (NYSE:KRO) has witnessed increased insider trading activity on the buy side in the past several months, whereas insider selling has been nonexistent for several years. Klemens T. Schluter, Chief Operating Officer of Global Operations, bought 5,000 shares last Tuesday at a price of $5.74 per share, boosting his overall holding to 21,378 shares.

Kronos Worldwide is a producer and seller of value-added titanium dioxide pigments, or TiO₂, used in a variety of manufacturing applications such as plastics, paints, paper, and other products. According to fresh estimates, Kronos was the largest producer of TiO₂ in Europe last year, with a market share of 18%. The company also had a 15% share of North American TiO₂ sales volumes in 2015. The company’s net sales declined $303.1 million or 18% year-on-year in 2015 to $1.35 billion. The decrease was mainly driven by a decrease in TiO₂ prices due to competitive pressures. Kronos Worldwide’s average selling prices at the end of 2015 were 17% lower than at the end of the previous year. Moreover, the company’s average selling prices were impacted by a higher share of sales generated in lower-priced export markets. Shares of Kronos have lost 58% in the past 52 weeks. It should be noted that Kronos’ management observed higher demand for its products in certain primary markets in late 2015, so the company appears to be in a bottoming out phase at this point in time given the highly-anticipated price increases for TiO₂. The number of money managers from our system with stakes in the company increased to eight from six during the December quarter. Ken Griffin’s Citadel Advisors LLC owns nearly 117,000 shares of Kronos Worldwide Inc. (NYSE:KRO) as of December 31.

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