Time to Go Long These Three Stocks? Insider Buying Metric Suggests So; Valeant Pharmaceuticals Intl Inc. (VRX) Among Them

All major U.S. stock indexes closed sharply higher on Thursday, thanks to the European Central Bank’s hints at more economic stimulus measures at its December meeting and to a handful of fresh earnings reports. The Dow Jones Industrial Average gained 320.55 points or 1.87% yesterday, formally buzzing off the correction territory. The Dow closed at 17,489.16 on Thursday, which also marks its highest close since mid-August. Meanwhile, the S&P 500 advanced by 3.57 points or 1.66%, mainly dragged by the struggling healthcare stocks. Leaving the statistics aside, some corporate insiders have been purchasing more stock lately, which could point to the fact that they expect their companies’ stock to appreciate in the upcoming future. Generally, insider buying is quite straightforward to interpret, as insiders tend to buy shares expecting them to go up in price. Even so, there might be more sophisticated reasons on why insiders buy stock, so one should closely examine each insider’s move prior to jumping onto the market. Having this in mind, the following article will discuss the insider buying activity at three companies, one of which represents a well-known struggling pharma company.

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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 more than 102% over the ensuing 3 years, outperforming the S&P 500 Index by more than 53 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 kick off our discussion by looking into the insider buying activity at pharmaceutical giant Valeant Pharmaceuticals Intl Inc. (NYSE:VRX). Director Ronald H. Farmer purchased 1,500 shares on the Toronto Stock Exchange this Wednesday at prices of CAD$193 (~USD$147.75) and CAD$158.79 (~USD$121.56). Following the transaction, the Director owns 15,532 shares. The shares of the pharma company have lost nearly 50% over the past month, as a result of the serious pressure over drug pricing. Earlier this week, well-known short-seller Citron Research accused Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) of using specialty pharmacies to puff up revenue, which put even more downward pressure on the stock (see details). The company’s management denied the allegations made, but could not put a halt to the massive sell-off of its shares. However, the pharma company has the ability to alleviate all the concerns around the company in a conference call on Monday, which is set to lay out facts regarding the allegations made by Citron Research. Bill Ackman’s Pershing Square was the top shareholder of Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) within our database at the end of the second quarter, holding 19.47 million shares.

The next page will discuss the insider buying activity at other two companies.

Moving on to the next potential buy candidate, Performance Sports Group Ltd (NYSE:PSG) saw one of its directors acquire stock this week. Specifically, Director Lawrence Lucchino purchased a 8,065-share stake on Tuesday at a price of $12.53 per share. The developer and manufacturer of high performance sports equipment and apparel has been struggling recently, as revealed by its earnings report for the fiscal first quarter that ended August 31. Performance Sports Group Ltd (NYSE:PSG) posted revenues of $175.0 million, compared to $197.1 reported a year ago. At the same time, the company’s net loss came to $4.4 million, compared to net income of $10.8 million reported a year ago. The strong U.S. dollar greatly impacted the company’s top- and bottom-lines, as it lowered the adjusted earnings per share figure by roughly 60% or $0.21 relative to the same period last year. The stock has lost 36% year-to-date, which might indicate that the Director acquired the block with the belief that they were undervalued. Amy Minella’s Cardinal Capital was bullish on Performance Sports Group Ltd (NYSE:PSG) at the end of the June quarter with a stake of approximately 742,000 shares.

Lastly, Skyline Corporation (NYSEMKT:SKY) had two insiders purchase shares this week. Chief Executive Officer bought a 10,000-share block on Wednesday at a price of $2.99 per share, and currently owns 11,000 shares. Similarly, Director John C. Firth acquired 3,000 shares on the same day for exactly $3 each, boosting his stake to 3,500 shares. These acquisitions came after the maker of manufactured homes and RV units revealed its earnings report for the first quarter of fiscal 2016 on October 15, which pleased the market. The shares of Skyline Corporation (NYSEMKT:SKY) have gained more than 23% since the earnings report, but are still 20% in the red year-to-date. The company posted net sales from continuing operations of $48.74 million, which decreased by 2% year-over-over. Even so, Skyline Corporation narrowed down its net loss to $834,000 from the $3.77 million figure registered a year ago. If one is considering pouring cash into the stock, please bear in mind the risks associated with trading low-priced stocks. Jeffrey Gendell’s Tontine Asset Management reported ownership of 390,000 shares in Skyline Corporation (NYSEMKT:SKY) through the 13F filing for the June quarter.

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