What Has These Insiders Excited About Their Companies’ Stock?

Investors have been monitoring insider trading activity for years, as corporate insiders surely have more in-depth knowledge about their companies’ operations and industries than an average investor. Of course, they are not allowed to trade based on material non-public information, but this does not necessarily mean that they do not have their own perception about their companies’ future prospects. Typically, investors tend to pay more attention to insider buying rather than insider selling, as the former type of activity is quite straightforward to interpret. Extensive research has provided evidence that insider purchases are profitable and non-insiders can outperform the broader market by mimicking insiders’ moves. However, one should not blindly follow each insider buy and expect to generate exorbitant returns; insiders are also prone to making mistakes on some occasions. Each insider trade should be closely analyzed and accurately interpreted in order to eliminate potential losing trades from great buying opportunities. The Insider Monkey team pinpointed three companies that have registered heavy insider buying since the beginning of the current trading week and this article will attempt to stipulate what might have propelled these companies’ insiders to purchase stock.

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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 three-plus 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 begin our discussion with Las Vegas Sands Corp. (NYSE:LVS), which has recently seen an insider buy stock for the first time in more than five years. Director Steven L. Gerard purchased 1,000 shares on Wednesday at a price of $47.95 per share. The Director currently owns a stake of 2,818 shares valued at nearly $138,000. Despite facing a challenging operating environment in Macau, especially in the high-end gaming segment, the casino operator performed quite well during the third quarter. Las Vegas Sands Corp. (NYSE:LVS) reported third quarter adjusted earnings per share of $0.66, compared to EPS of $0.84 reported a year ago and $0.64 anticipated by analysts. However, the company posted net revenue of $2.89 billion, which decreased by 18.1% year-over-year and missed analysts’ expectations by $80 million. The stock is currently trading at a forward P/E ratio of 18.96, slightly above the ratio of 18.5 for the casinos and gaming sector. Murray Stahl’s Horizon Asset Management owned approximately 749,000 shares of Las Vegas Sands Corp. (NYSE:LVS) at the end of June.

The next page of the article discusses the insider buying activity at Stepan Company (NYSE:SCL) and Cempra Inc. (NASDAQ:CEMP).