Insider trading has been extensively studied by scholars over the last decades, as finding a tool allowing one to consistently beat the broader market would be worth quite a lot of money. Several studies have found that insiders can earn abnormal returns of up to 30%, which might actually represent a strong argument for tracking insider trading activity. Considering the evidence demonstrating that non-insiders could also earn abnormal returns by following insiders’ purchases, we identified three companies that have seen a large volume of such moves recently: Third Point Reinsurance Ltd. (NYSE:TPRE), H&E Equipment Services Inc. (NASDAQ:HEES), and National Health Investors Inc. (NYSE:NHI).
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 more than 123% over the ensuing 35 months, outperforming the S&P 500 Index by nearly 66 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 look into Third Point Reinsurance Ltd. (NYSE:TPRE), which is one of the stocks insiders have been loading up on recently. John R. Berger, who currently serves as Chairman and Chief Executive Officer of the company, purchased 100,000 shares at prices in the range of $13.95 to $14.13, augmenting his stake to 309,881 shares. The shares of Third Point lost slightly over 2% since the beginning of the current year. Third Point Reinsurance, a provider of specialty property and casualty reinsurance products around the world, recently posted its financial results for the second quarter of 2015. The company reported net income of $15.7 million or $0.15 per diluted share for the quarter, compared to $31.3 million or $0.29 per share reported in the same quarter a year ago. Third Point has been successful in building its reinsurance platform in the United States, which delivered significant growth in premiums during the latest quarter. Brian Ashfor-Russell and Tim Woolley’s Polar Capital is one of the hedge funds within our database that is bullish on Third Point Reinsurance Ltd. (NYSE:TPRE), holding a position of 935,000 shares as of June 30.
Another stock that has seen strong insider buying activity recently is H&E Equipment Services Inc. (NASDAQ:HEES), which is a company that rents, sells, and provides parts and services support for four categories of equipment: hi-lift or aerial work platform equipment, cranes, earthmoving equipment, and industrial lift trucks. Bradley W. Barber, the President and Chief Operating Officer of H&E Equipment Services, acquired 10,000 shares on August 13 at $17.00 apiece. Following the transaction, Barber’s holding now comprises 76,113 shares. The shares of the company have lost nearly 39% year-to-date, so the recent insider buying activity might suggest that the stock is likely to rebound in the upcoming months; it’s hard to believe that the President and CEO of the company is investing to lose money. On July 30, H&E Equipment Services posted its financial results for the second quarter of the year and announced a regular quarterly cash dividend of $0.275 per share, an increase of 10% from the previous quarter. The company posted revenues of $262.4 million for the quarter, compared to $280.4 million reported last year. At the same time, the company’s net income came to $11.5 million, compared to $15.7 million reported a year ago. Within our database, Israel Englander’s Millennium Management is among the largest shareholders in H&E Equipment Services Inc. (NASDAQ:HEES), owning 206,765 shares as of March 31.
One final stock that has seen interesting insider activity lately is National Health Investors Inc. (NYSE:NHI), a Tennessee-based real estate investment trust (REIT). Five different corporate insiders made purchases on August 13, however, we’ll be discussing only the most noteworthy acquisitions. Eric Mendelsohn, who has recently been appointed interim President and CEO at National Health Investors after Justin Hutchens stepped down, purchased 1,500 shares at $58.80 per share, boosting his stake to 3,500 shares. At the same time, Roger Hopkins, the Chief Accounting Officer of the company also acquired 1,500 shares, at a price of $58.61 per share, adding them to a holding that now comprises 34,558 shares. Let’s not forget to mention that Kristin Sallee Gaines, who acts as the Chief Credit Officer of National Health Investors, purchased 2,000 shares of the company and now owns a stake of 27,872 shares. The shares of the REIT have lost over 16% since the beginning of the current year, and it seems that corporate insiders see this outcome as a profitable opportunity now. The company recently posted its financial results for the second quarter, posting net income per diluted share of $0.83, up by 9.2% year-over-year. Israel Englander’s Millennium Management is also the largest shareholder in National Health Investors Inc. (NYSE:NHI) within our database, holding a stake of 470,979 shares as of March 31.
Disclosure: None
