What Can Investors Learn From These Companies’ Insider Buying Activity?

It is widely known to the masses that corporate insiders have a better understanding of a company’s products, ongoing challenges and future prospects than analysts, financial advisors or other non-insiders. Tracking insider trading behavior at interested companies should play a key role in one’s due diligence process on those companies, as both buying and selling activities of a company’s insiders can offers useful insights on how these well-informed individuals feel about their company’s stock and future prospects. Even though there are numerous factors that might scare away insiders from buying their companies’ stock at the moment, including growing concerns about a global economic slowdown and the prospect of rising interest rates in the U.S., some insiders have been consistently buying shares in their own companies’ stock lately. Insider buying activity might represent a worthwhile signal that some companies’ shares are undervalued and poised to generate attractive returns in the future. Having said that, the following article will discuss the insider buying activity registered at three companies, and will also discuss the recent performance of 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.

Let’s start off our discussion by looking into the insider buying activity at CIGNA Corporation (NYSE:CI), which had not seen insiders buy stock for more than two years until last week. Director John M. Partridge reported purchasing 8,820 shares on Thursday at prices between $139.31 and $139.56 per share, including 1,620 shares that are held by a trust fund for his children. After the recent acquisition, the Director holds a direct ownership stake of 29,251 shares. At the end of July, CIGNA Corporation (NYSE:CI) and Anthem Inc. (NYSE:ANTM) announced merger agreement whereby the latter is set to purchase all outstanding shares of the former. This merger can create the largest health insurer in the United States, as it combines the second- and fifth-largest health insurance companies by revenue. Under the terms of the agreement, CIGNA shareholders are set to receive $103.40 in cash and 0.5152 Anthem share for each CIGNA common share owned. At current prices, the deal values each share of CIGNA at roughly $173, which is at least 23% higher than the current share price of CIGNA. This discrepancy reflects the risks associated with a potential failure of the merger, as this deal has been facing widespread criticism that it might harm competition. Hence, the aforementioned insider purchase might point to a higher probability that the merger will win regulatory approval. Larry Robbins’ Glenview Capital upped its stake in CIGNA Corporation (NYSE:CI) by 63% during the third quarter to 4.60 million shares.

The second page of this insider trading article reveals the insider buys registered at William Lyon Homes (NYSE:WLH) and Plains All American Pipeline L.P. (NYSE:PAA).

William Lyon Homes (NYSE:WLH) is another company that witnessed unusual insider trading activity last week. Executive Chairman General William Lyon snapped up 33,000 shares on Friday at a weighted average price of $15.40, lifting his overall holding to 58,009 shares. The shares of this regional homebuilder are 24% in the red year-to-date and are trading at a very appealing trailing price-to-earnings ratio of 11.45, which is significantly below the average of 22.73 for the companies included in the S&P 500 Index. The housing market in the U.S. has been continuously strengthening since the aftermath of the financial crisis of 2008. Many markets across the U.S. have witnessed strong economic growth, positive demographic trends and decreasing mortgage rates in recent years. Meanwhile, the company reported revenues from homes sales of $681.8 million for the nine months that ended September 30, which marked an increase of 35% year-on-year. William Lyon Homes also registered new home orders of 2,059 homes for the first nine months of 2015, up from 1,210 reported a year ago. Nonetheless, the company had a backlog of 1,032 homes sold, but not closed on September 30, marking a 42% increase in units as compared to the backlog registered on September 30, 2014. The number of smart money investors with positions in the regional homebuilders increased to 21 from 14 during the September quarter. Billionaire John Paulson of Paulson & Co. holds a 3.32 million-share stake in William Lyon Homes (NYSE:WLH) as of September 30.

Let’s wrap up our discussion by analyzing the insider buying activity at Plains All American Pipeline L.P. (NYSE:PAA). Executive Vice President Phillip D. Kramer purchased 25,000 shares on Monday at prices in the range of $18.80-to-$19.22 per share and currently holds 373,624 shares. The owner and operator of midstream energy infrastructure and provider of logistics services for crude oil, natural gas liquids, natural gas and refined products has seen its shares decline 62% in 2015. The company generated net income of $657 million for the nine months that ended September 30, down from $994 million reported for the same period in 2014. The decrease was mainly attributable to the disappointing results generated from the company’s Supply and Logistics segment, which was impacted by depressed differentials from the transitioning crude oil market and higher competition. The company’s financial results were also impacted by costs and revenue losses in connection with a crude oil release from its Las Flores to Gaviota Pipeline (Line 901) in California. Meanwhile, the company has a cheap valuation at the moment if solely looking at its trailing and forward P/E ratios. The stock is trading at a trailing P/E ratio of 15.78 and a forward P/E ratio of 10.32, which is below the average of 17.35 for the S&P 500 benchmark. Jim Simons’ Renaissance Technologies holds a 728,914-share position in Plains All American Pipeline L.P. (NYSE:PAA) as of the end of the third quarter.

Disclosure: None